Risk Management's Evolution In Insurance

Identifying, pricing and managing risk is what insurance is all about, going back thousands of years at least to the time of Hammurabi's Code. It's a longstanding discipline that's amazingly dynamic.

The Consumerization of Risk ManagementThe July/August 2013 digital issue of Insurance & Technology examines the technology developments that are helping make enterprise risk management a reality for insurers. Our cover story explores how technologies such as telematics and analytics are letting insurance companies help policyholders modify their own risks -- which also helps carriers reduce exposures and claims. To read more, download our July 2013 digital issue now.

We're now in an era where risk management prowess is more important and more complex and challenging than ever. Every industry practices risk management, but this complexity is perhaps most evident in insurance, where the enterprise risk management "umbrella" encompasses not only financial risk (reserves, solvency, etc.) but also all the kinds of risks that are considered in the underwriting process (environment, locale, health, behavior, etc.).

These distinctions are increasingly arbitrary as more insurers pursue a true enterprise risk management strategy, the focus of this Insurance & Technology issue. The big data/analytics-driven ability to quantify risk through techniques such as product modeling and revenue projection has been a game changer. It gives risk professionals the ability to understand how different kinds of risks affect all aspects of the business -- and to make more informed decisions about how to handle those risks. In a recent survey of insurance chief risk officers, Ernst & Young identified risk quantification as one of four big themes CROs are addressing. "Quantification is becoming increasingly important and more companies are devoting added resources to economic capital, capital optimization and the measurement of market, credit and operational risks," according to the study's executive summary.

This may be a chicken-and-egg consideration, but the risk quantification imperative comes at a time when CROs are dealing with new and expanded forms of regulation around risk -- compliance with which will demand the ability to corral, access, interpret and report on a vast amount of internal and external information. These regulations include, but are not limited to, Solvency II, the Own Risk and Solvency Assessment (ORSA) and the Federal Stability Oversight Council's designation of some companies as systemically important financial institutions. Thirty percent of the participants in the Ernst & Young CRO study say they expect ORSA, which will require insurers to provide forward-looking reports on their risk and solvency positions, to present the biggest implementation challenges (compared with 15% who cite Solvency II). And in the wake of events such as Superstorm Sandy, last summer's wildfires and the recent tornadoes in Oklahoma, expect more pressure on insurers to justify tougher underwriting in catastrophe-prone areas.

[Making ERM Part of an Insurer's Culture Requires People, Not Just Technology]

It's not surprising that half of respondents to the E&Y study say their risk departments have increased in size over the past year. Some of that expansion must be due to the IT-related prowess that's essential to effective risk management today. You'd be taking a risk by not making that kind of investment.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio