Insurance companies are in a unique position when it comes to risk management. While many businesses rely on their insurers to mitigate various types of risk, the insurance company itself also needs to seek protection from operational and investment threats. The rise of online business has also made cybersecurity risk a common threat for insurers.
Insurance companies often start by purchasing coverage from a reinsurer. While this option accounts for many types of operational risk, it doesn’t fully cover your business from potential disruptions. For example, the loss of business from poor customer service (and a damaged reputation) may not be included in many reinsurance policies. Furthermore, cybersecurity threats that may arise from compromised company data will also need to be mitigated. This is where risk management comes in.
By definition, risk management is the process of identifying, assessing, and mitigating various types of risk. Insurance companies need a robust and reliable risk management plan to ensure that they’re protected against potential threats to daily operations.
How risk management works in the insurance sector
Some of the risks that insurance companies face include:
- Underwriting risks
- Market risks
- Customer service
To protect your business from these risks, you need a risk management plan that’s tailored towards your operational environment. For example, a risk assessment can help you identify and prioritize the threats that your company faces. You can then proceed to mitigate, transfer, ignore, or manage such risks.
If customer service is a risk that you face, you can develop a framework for collecting feedback from customers. This feedback can be used to identify incompetency in your service delivery- after which you can implement steps towards improving customer service.
Risk management also allows your insurance company to keep up with emerging threats. By regularly analyzing your risk environment, you’ll be able to stay ahead of underwriting risks, reinsurance loopholes, and cybersecurity threats. Because risk management is a strategic and thorough process, you’ll also be able to remain compliant with evolving regulations, develop an action plan for addressing risk in real-time, implement better decisions, and maintain continuous operations.
A common threat that many insurers face is data security. Insurance companies collect and store lots of personal information from their clients. If such data were to end up in the wrong hands, policyholders would have their social security numbers, addresses, credit card information, and even biometric data compromised. And because the cost of a data breach can be crippling to any company, the significance of cybersecurity cannot be overemphasized.
The National Association of Insurance Commissioners (NAIC) established a model law in 2017 that would protect all nonpublic data that insurers collect and store (when calculating premiums for policyholders).
A risk management plan allows insurance companies to tighten up their cybersecurity practices. Such a plan involves designating a risk manager, identifying threats to data security, evaluating potential damages, and reviewing current policies to identify areas of improvement.
Insurers also need to implement actionable steps that can mitigate the risks they face. These steps include designing information programs, selecting security controls, and using data to respond to emergent threats.
Risk management for insurance companies involves developing a framework that can equip insurers with the tools, skills, and strategies necessary for mitigating risk exposure. To achieve this goal, you’ll need to come up with specific steps that help you keep up with your current risk environment.
A risk management process for insurance companies should include the following steps:
An information security program ensures that all data collected and used by the insurance company is kept safe from hacking. The program also specifies steps to be taken when risks are encountered.
You may decide to mitigate or transfer such risks to a third-party vendor. However, all vendors should also take thorough steps when protecting company data.
NAIC developed 11 security controls that apply to many different types of insurance companies. These controls outline steps you can take to avoid common cybersecurity threats during daily operations.
By selecting the most appropriate controls for your business, you can protect your systems from hacks and other similar threats.
You should also model action plans to take when encountering particular threats. Such plans should be made with input from management, specific departments, and IT. Having action plans in place will help you react to risks on time and mitigate potential losses.
By using data analysis techniques, you can better understand the potential risks and develop a plan for management.