Risk management in insurance is the process of identifying, analyzing, evaluating, and treating loss exposures to minimize the likelihood of things going wrong. It is concerned with all loss exposures, not only the ones that can be insured. Insurance is a technique to finance some loss exposures and make them more predictable. The key to an economical and efficient risk program is control over the risk management functions with assurance that actions performed are desirable, necessary, and effective to reduce the overall cost of operational risk. Risk management strategies involve many concepts.
Specifically, risk management in insurance involves the following:
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Identifying risks: Until you identify risks, you can’t make good decisions about managing them. Risk management begins at the top of any organization. If the head of the company emphasizes safety, compliance, and lawful and ethical behavior, the rest of the organization is more likely to follow suit.
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Minimizing risks: Risk management involves taking steps to minimize the likelihood of things going wrong, a concept known as loss control.
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Purchasing insurance: Risk management also involves the purchasing of insurance to reduce the financial impact of adverse events on a company when, despite best efforts, bad things happen.
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Assessing and quantifying risks: Insurance risk management is the assessment and quantification of the likelihood and financial impact of events that may occur in the customers world that require settlement by the insurer.
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Managing strategic risks: Insurers should consider adopting strategic risk management (SRM) as a holistic framework to manage the potential downside of disruptive risks and achieve faster growth by better preparing them to capitalize on the resulting opportunities.
Overall, risk management in insurance is a crucial process that allows individuals and businesses to operate smoothly in spite of the risks and the reality that “bad things” will occasionally happen.
