While risk management is an accepted priority, it also can become a very political endeavor, depending upon the culture and aggregate claims experience. The challenge is implementing an integrated approach that can be ingrained across the insurance organization and in customer risk management practices. Without a coordinated risk management strategy, organizations will continue to struggle with unsatisfactory policy iterations before risk-handling procedures and controls are efficiently aligned to stabilize productive relationships.
Insurance companies need to tackle three important barriers to ensure a successful, integrated risk management process within their underwriting practices:
1. Lack of Consistent Measurement Methodology
Underwriting risk measurement is complex, and no methodology will accurately capture the full picture for forecasting losses. This is further complicated by the lack of consistency across various institutions' approaches for reporting losses and settling claims. The more detailed, extensive — and yet flexible — the underlying loss control documentation, the more an insurance company can devise granular risk retention strategies based on informed insights into customer segmentation.
2. Hidden Information Gaps in the Quantification of Risk
To the extent that an institution has a good understanding of its portfolio risks and exposures -- where, what and how much -- it can be proactive in its underwriting strategy. However, such transparency is not easy to come by without significant investment in systems, analytics tools and sophisticated modeling techniques that can be applied at the customer relationship level. Frequently risk prevention measures are brought in after the event, in a reactive fashion. To what extent is the underwriting manager fully aware of the existing risks? Are business units still making decisions without coordinating and communicating exposures to the customer? These information gaps represent an unknown risk exposure, and the insurance company is not even in the position to decide how to mitigate these risks. This leads naturally to the next barrier ...
3. Lack of Integrated Risk Procedure Ownership
Active risk management is also about ensuring that the full organization identifies with and takes ownership of its own risk mitigation responsibilities. Underwriting cannot sit in its organizational silo and be disconnected from risk management decisions across the business. Pushing risk awareness and loss control procedures down into various functional roles will help establish a coordinated and proactive approach to risk management. In fact different functional roles are directly associated with certain types of risk, including operational risk. The greater their ability to communicate risk concerns, identify risk patterns and support the development of appropriate risk controls, the more effective risk management capabilities will be for profitable long-term customer relationships.
Business Intelligence: Mitigating Risk Through Greater Information Insights
In response to these issues, insurers have realized that one of their most valued and differentiated assets is information — which, when applied to address an important business decision, becomes business intelligence (BI).
Many leading insurers have incorporated BI as an integral part of their business strategies and are looking to move beyond historical reporting to a higher level of predictability and business insight. Their goal is to embed analytics into critical underwriting processes to more easily determine factors impacting the performance of products, reconfigure coverage based on risk and better manage pricing.
The timing of these new BI initiatives couldn't be better. The industry is still struggling to overcome the limitations of early generations of insurance systems, predominantly mainframe-based and homegrown systems that were designed to process transactions — not to transform data into actionable information for underwriting decision making in alignment with enterprise risk policy.
Thankfully, this is changing as BI products that let insurance managers take the pulse of their underwriting operations are becoming more widely adopted. Key capabilities include:
- Reporting and Analysis — providing up-to-the-minute answers to the "Why" behind an insurance company's underwriting performance, drawing upon any data source, both internal and external.
- Scorecards — letting insurers set warning indicators based on key underwriting performance metrics, such as limiting exposure in a certain geographic area, line of business or product.
- Dashboards — offering gauges, charts, maps and other graphic elements to translate complex information into a dynamic, at-a-glance view of business conditions.
In the end the market will separate winners from losers. Insurance carriers that make strategic investments in business insight — to improve business efficiencies, optimize underwriting practices, mitigate risk exposures accordingly, and grow and scale their businesses profitably — will be best positioned to prosper in the months and years ahead.