What is risk in insurance

Insurance Risk Management is the assessment and quantification of the likelihood and financial impact of events that may occur in the customer's world that require settlement by the insurer; and the ability to spread the risk of these events occurring across other insurance underwriter's in the market. Risk Management work typically involves the application of mathematical and statistical modelling to determine appropriate premium cover and the value of insurance risk to 'hold' vs 'distribute'.

Table of Contents Show

Insurance Risk Management: Value
Insurance Risk Management: Core Services
Work Undertaken
Work Undertaken
Work Undertaken
Concept of Risk Insurance
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Insurance Risk Management: Value

Alignment of the pricing market strategy and reinsurance arrangements to the organisation's risk appetite as well as optimising the goals of the organisation
Assist clients to recognise risk events and changes to claim rates earlier, so as to move towards a more market responsive, risk-based pricing approach which ensures the efficient deployment of capital and a reduction in extreme risk event losses.
Enhance the feedback mechanism from claims function to underwriting and product development processes to improve the performance and profitability of these processes.

Insurance Risk Management: Core Services

Create the right risk strategies to achieve the enterprises strategic aims and implements the optimum frameworks to ensure risk is appropriately managed.

Work Undertaken

Assessment, design and implementation of Insurance Strategies
Assessment, design, implementation of Insurance Risk Frameworks
Assessment, design and implementation of insurance risk related risk portfolios and assessment methodologies
Assessment, design and implementation of Insurance Risk Appetite Statements
Claims Function KPI design
Commodity Sector Strategy Input
Insurance Product Pricing
Underwriting Function KPI design
Reinsurance Program Design

Example

Put in place an enhanced risk framework following an acquisition.

Putting words into action – delivering risk performance within agreed tolerances at the sharp end – day after day.

Work Undertaken

Insurance Risk Analysis – Trend analysis
Insurance Risk Analysis – Exposure Measurement
Insurance Risk Exposure Management
Risk capital Reserving
Claims Result Analysis
Reinsurance Effectiveness
Insurance Risk Aggregation and concentration risk measurement and management
Peer review Actuarial Services
Audit review of liabilities, capital etc
Insurance Needs Assessment and/or Insurance Selection recommendations for non-insurance clients
Risk Management Software Systems - Insurance Risk Underwriting Software Design, Specifications, Testing, Review
Mergers and Acquisitions assistance

Example

Assisted in the development of an enhanced Risk Appetite process for a general insurer.

Create the optimum organisational solutions and equips the enterprise with the right skills and capabilities to manage risk to achieve strategic aims.

Work Undertaken

Assessment, design and implementation of Insurance Risk Management functions
Claims Function – Assessment
Underwriting Function Assessment
Appointed Actuary Services
Interim management solutions: Insurance Risk Officers and other professionals

Example

Deployment of an experienced PwC Partner to act an interim CRO for the Wealth Business of a 'Big 4 Bank'.

Risk insurance refers to the risk or chance of occurrence of something harmful or unexpected that might include loss or damage of the valuable assets of the person or injury or death of the person where the insurers assess these risks and, based on which, work out the premium that the policyholder needs to pay.

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Source: Risk Insurance (wallstreetmojo.com)

Types

The following are the different types of risk in insurance:

#1 – Pure Risk

Pure risk refers to the situation where it is certain that the outcome will lead to loss of the person only or maximum it could lead to the condition of the break-even to the person, but it can never cause profit to the person. An example of pure risk includes the possibility of damage to the house due to natural calamity.
In case any natural calamity occurs, it will damage the house of the person and its household items, or it will not affect the person’s home and household items. Still, this natural calamity will not give any profit or gain to the person. So, this will fall under the pure risk, and these risks are insurable.

#2 – Speculative Risk

Speculative risk refers to the situation where the direction of the outcome is not specific, i.e., it could lead to a condition of loss, profit, or break-even. These risks are generally not insurable. An example of speculative risk includes the purchase of the shares of a company by a person.
Now, the prices of the shares can go in any direction, and a person can make either loss, profit, or no loss, no profit at the time of the sale of those shares. So, this will fall under the Speculative risk.

#3 – Financial Risk

Financial riskFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy.read more refers to the danger in which the outcome of the event is measurable in terms of the money, i.e., any loss that could occur due to the risk can be measured by the concerned person in monetary value. An example of the financial risk includes a loss to the goods in the warehouse of the company due to the fire. These risks are insurable and are generally the main subjects of the insurance.

#4 – Non-Financial Risk

Non-Financial risk refers to the risk in which the outcome of the event is not measurable in terms of the money, i.e., any loss that could occur due to the risk cannot be measured by the concerned person in the monetary value. An example of the non-financial risk includes the risk of poor selection of the brand while purchasing mobile phones. These risks are uninsurable since they cannot be measured.

#5 – Particular Risk

Particular risk refers to the risk which arises mainly because of the actions or the interventions of the individual or the group of some individuals. So, the origin of the particular risk by individual-level and impact of the same is felt at a localized level. An example of a specific chance includes an accident on the bus. These risks are insurable and are generally the main subjects of the insurance.

#6 – Fundamental Risk

Fundamental risk refers to the risk which arises due to the causes which are not under the control of any person. So, it can be said that the fundamental risk is impersonal in its origin and the consequences. The impact of these risks is essentially on the group, i.e., it affects the large population. The fundamental risk includes risks on the group by events such as natural calamity, economic slowdown, etc. These risks are insurable.

#7 – Static Risk

Static risk refers to the risk which remains constant over the period and is generally not affected by the business environment. These risks arise from human mistakes or actions of nature. An example of static risk includes the embezzlement of fundsEmbezzlement refers to the act of secretly taking, withholding, or misappropriating money or other asset that is kept, maintained, or placed under an individual's responsibility by the company for which he or she works.read more in a company by its employees. They are generally easily insurable as they are easy to measure.

#8 – Dynamic Risk

Dynamic risk refers to the risk which arises when there are any changes in the economy. These risks are generally not easy to predict. These changes might bring financial losses to the members of the economy. An example of the dynamic risk includes the changes in the income of the persons in an economy, their tastes, preferences, etc. They are generally not easily insurable.

Concept of Risk Insurance

The term of risks in insurance says that how the insurers evaluate their risks in issuing insurance policies to the policyholders on the loss that may occur due to loss, theft, or damage to the property or even someone is injured. This concept also says the types of those risks are involved in the issuance of insurance. It also helps the insurers to evaluate the risk and calculate the claims that can be paid in the future at any point in time if the damage or loss occurs.

Conclusion

Thus the risk insurance or the risks in the insurance are the chance that unexpected events will occur, which could cause the loss to the person or its property. Most of the risks are nowadays insurable by insurance companies. These companies calculate the probability of the events and their impact and then calculate the premium accordingly.