Risk Management Challenges In The Insurance Vertical

By Author: hyperrig
Total Articles: 1
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The insurance business is going through a radical period of change. With mergers and acquisitions creating super entities both in the insurance and re-insurance sectors. Coupled together with the concept of securitisation of insurance risk, few other industries are facing the same scale of IT related issues. In many traditional insurance circles the notion of insurance risk management software means little more than using a spreadsheet to keep a current list of active contracts. It is still a common site around Lloyds of London to see brokers walking around with large bundles of paper work under their arm.

Things, however, are about to change and an industry that has always relied heavily on manual processes and paper work is about to enter the information age. At the heart of this radical change is the notion of securitization of insurance risk. Securitization is a process that other financial services verticals have already been through. If we take bank credit for example, in the past five to ten years the emergence of credit derivatives within the capital markets has meant that banks have successfully securitized ...
... the credit risk inherent in traditional loan portfolios. In the forth coming decade we will see the same thing occuring in the insurace industry where re-insurers in particular will off load insurance risk as packaged securities. This process has already began with so called cat bonds and other insurance linked derivatives.

The implications for the insurance industry as a whole are not yet fully realised by many. Insurance risk managemement software is in its infancy. Talk to ten insurers and they will each give you a different definition of insurance risk management. But in a world where mortality rates used to rule the day insurers will now be faced with insurance premiums that are as much linked to captial market forces as they are to the underlying insured risk. As capital markets become more and more integrated, the boundaries between fundamental pricing of risk and pure market sentiment is becoming blurred. And so insurers, like it or not, will be forced to change the way they do things. In the same way that investment banks now need operational systems that are integrated end-to-end with market and credit risk management software, so will insurers. The potential for catastrophic operational losses greatly increases once the dynamic of market forces and market sentiment enter the equation. Everything from contract management to simulation of risk scenarios will need to be integrated so that insurance firms get an enterprise view of their risk.

One solution is to invest in a risk management framework. That is, risk management software that allows you to integrate data and systems together across the entire firm. The important thing here is that the risk management software brings a high degree of flexibility. It must seamlessly integrate data and systems together from different regions, subsidiaries and departments and allow for an integrated view but not a prescriptive one. One thing is for certain, the changes about to befall the insurance industry will be unpredictable and the risk management software must reflect this by being highly flexible too.