Importance Of Risk Management In Insurance

In insurance risk refers to any possibility of loss or any other adverse event with a potential to interfere with organization ability to fulfill its mandate and which will call for submission of insurance claim. Risk management in insurance is defined as the practice of identifying potential risks in advance, analyzing them and taking precautions to reduce the risk. This is an action plan consisting procedures to follow in ensuring removal of risk.

The main purpose therefore of risk management is to identify potential risks before they occur in order to plan risk handling activities in advance, thus mitigating adverse impact to achieving project objectives.

In a project lifecycle, various risk factor need to be put in consideration. This helps in preventing the projects from harmful effects of environment, culture, financial or any other risks that a project many suffer from. Risk management ensures a smooth flow of project thus maximizing on productivity and revenue generation.

Risk management processes follow the same basic steps which includes a set of five steps.  These steps combine to deliver simple and effective risk management process. They are as follows;

  • Risk identification– This involves a process of uncovering, recognizing ad describing risks factors that may affect a project and its outcomes. During this stage, various techniques are employed to help in identifying potential risks and preparing project risk register.
  • Risk analysis– This follows the identification steps. It involves identification of effects of the risks registered to project goals and objectives. This information is also registered in the project risk register.
  • Risk evaluation– This helps to determine the magnitude, likelihood and the consequence that a risk may bring about in a project. It is also helps in deciding which risks are serious enough to warrant treatment.
  • Risk treatment; – This a very important step as it helps in developing a risk response plan. At this stage the organization is able to assess the highest ranked risks and plan a treatment process to achieve acceptable risk levels. It also helps in creation of risk mitigation strategies, prevention plans, and contingency planning. This in turn helps in minimizing the probability of negative risks and their effects.
  • Monitoring and review: – This is where you use the risk register you developed in your prior risk management steps. This helps to monitor, track, and review risks. In most cases risk is all about uncertainty, therefore by putting a framework around it helps in de-risking the project. Risk management process helps to intervene while a problem occurs. It avoids impulsive reactions to mitigation of problems that occur while undertaking a project. This makes for happier project teams and stakeholders.

Insurance business involves of risks from and individual/entity to the insurer. It is therefore important for insurance companies to develop a very robust and elaborate risk management policy in order to maximize on their performance. this helps in developing strong and effective risk management and evaluation strategies for insurers.

There are five key areas that an insurance company will look into while evaluating an entity risk management processes.

Risk management culture

This refers to the degree to which risk and risk management are important considerations in all aspect of corporate decision making. It encompasses the policy dimension of effective risk management. It also helps in evaluating the company’s’ philosophy as regards risk and its risk appetite, governance and organizational structure of its risk management procedures.

Risk control

This is an important process where an insurance company develops an opinion as concerns the insurer’s importance within general areas of credit risk, market risk, insurance risk and operational risk. This helps in evaluation of the entities quality risk management, risk monitoring, standards and limits for retained risks.

Extreme event management


This includes a process of envisioning the impact of likely disasters through scenario analysis and stress testing. This helps in identifying the potential company’s reputation, liquidity, and overall financial muscle in catastrophic events. This is essential in assessing the reliability and adequacy of catastrophic risk reinsurance and retrocession to reduce the impact of conceivable company’s disasters thus ensuring the survival of the enterprises.

It also factors in terrorism, national disasters, IT failures, power failure, fall in stock markets, and or any other disastrous event that a company may face within a short period of notice. His also helps the company in preparation ongoing disaster planning processes.

Risk and capital models

For most credit, market and insurance entities, the degree of exposure to risk is not readily available from the company’s accounting systems. It is therefore for these organizations to monitor, control, and manage risk exposures, indicative, predictive, and sensitivity risk measures.

There indicative measures that are readily available in the accounting systems or administrative or underwriting systems. These include life insurance sum insured, probable maximum loss, premiums earned, asset values, staff turnover rates, and audit exception reports,

Predictive measures can be estimated using complicated and simulation models, they take into accounts the expected shortfall and value at risk.

In capital it is important to look at the economic capital. This refers to the capital needed by an enterprise to provide support in an event of severe loss situation. This comes in different models depending with the nature of the enterprise. The main virtue of economic capital is, if determined consistently across all risks, it can be aggregated to achieve total capital requires by the company.

Strategic risk management

This refers to the risk involved due to the changing technological processes. It is therefore important for an organization to develop an action plan that will look into risk that will potentially disrupt the operations of the company due to technological shifts.

It is therefore important for an organization to consult insurance to undertake a risk assessment procedure in their organization thus making it easier to develop an elaborate risk management strategy and procedure. It also helps the insurance company in developing manageable and effective insurance covers for their insurers. Having an elaborate risk management procedure helps organization to have credibility in the marketplace and as a result they are more likely to attract and retain highly sophisticated customers in their business models