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Posts Tagged ‘Risk’

Do Indian insurance market need a professional CRO forum?

In Finance, Legal, Risk Management, Uncategorized on January 18, 2016 at 3:01 am

Recently, I interviewed CRO’s and senior management of Indian and UK insurance companies and found that most of UK insurance companies CROs often discuss risk related matter locally every month and at least attend two international CRO forums/institutes such as GARP, IRM or CRO forums at London market every year. They have also attended many risk certifications and top risk trainings. Surprisingly, I found rarely any CRO in India discuss risk related matters at local level and very occasionally they attend international level forums.

Decision Making Process, Risk Management

A CRO forum is a group of professional risk managers and CRO developing and promoting industry best practices in risk management. It is a platform where CRO’s can join together and discuss their issues. Recently, there is an increase in financial investments by foreign partners of many Indian insurance companies such as Standard Life, Aviva, AXA, Tokio Marine and Bupa. Efficient risk management is one of the most crucial aspect by these giant foreign MNC’s. India is emerging insurance market and there is high potential for growth.

Insurance companies in India are managing risk in their own silos from long time. Currently, there is no common forum where insurance companies can discuss their problems in managing risk and improve awareness about emerging risks. A platform is needed where foundational information can be provided on how to adopt and implement robust risk frameworks. A common pool of funds needed for research for setting examples of best practices and learning from mistakes. Perhaps, a Centre for Risk Governance would be best option.

Risk management implementation has to be enhanced at local, national and international level but how that remains an open question. Visibility of benefits of improving risk management practices are not short-term. Without enough capital, training of senior management in risk management is practically impossible. In such scenario, a CRO forum can play a promising role in uplifting Indian insurance industry risk management expertise. This is a need of hour.

Building trust and sharing data pose another challenge. Does it risk the reputation of insurance companies? Think of positive side, if it could be possible to have a forum where we can discuss risk related issues, enhance risk capacities and embed risks into strategic decision making, it would be few of the most desired objective for the companies. This obviously, require a professionally managed CRO forum with independent governing body.

Kindly share your views.


Why Understanding of Risk Management is Important for Managers?

In Uncategorized on September 17, 2015 at 4:25 am

Understanding of risk is complex which scare people to develop its understanding. Michael Power, Professor of London School of Economics (LSE), has brought attention to different boundaries of risk management from ‘Risk Management of nothing’ to ‘Risk Management of Everything’. This can be interpreted: one cannot totally avoid the risk management and cannot claim to include all existing risk. Inclusion and exclusion of risk depends upon the understanding of risk itself within management.

In this blog, first I will discuss what a manager is supposed to do and why he/she faces dilemmas in management of risks. Then how those dilemmas can be tackled through better understanding of risk management.

A manager does not supposed to do all work by himself/herself rather he/she engage in planning, organising, directing and controlling. The management major role is to enhance motivation of the team to deliver work in timely and effective manner with agreed quality to achieve organisational objectives.

Risk navigation can be a tight rope walk

Several questions arise when management process actually followed during practice at grassroot level.

  1. How to estimate the risks during planning of management activities
  2. How to organise work so that it can get complete on time with agreed quality without operational errors?
  3. If I pass on the information to my colleagues, how I will make sure it is understood same and performed in the same manner as directed?
  4. There is a likely chances of realizing a gap between the expectation set and the actual results? How to control the risk to achieve organisational objectives?

Management knowledge of risk should not only confined to resolving dilemmas but also to enhance strategies. A better planning, organising, directing and controlling can only be achieved if management understand their own risks. For example, if a company would like to construct a building and have experience of 5 years. The company recorded its own risks for example 100 risks related to construction in particular geography and use industry risk data. This company can better estimate the risk from a new company in the market having no experience of handling construction risks.

All companies face operational errors whether they are large or small. Understanding of the operational risks can make safety systems more profound and robust to deal with possible errors. It is observed that corrections of errors do not pose much issues rather repetition of errors make blunders and cause failures.

The understanding of risks also support managers to grow in their career path. Board of the director, CEO of the company has to deal with risks at strategic level which have higher impact though, general management has to face only day to day risks. Expectation of understanding of risk from an agent of the company and director would be substantially different. Risk Management is an important part of Management at all level and cannot be separated. Don’t, get frighten from risk just learn to deal with it, the benefits will follow you.

“A ship is always safe at the shore – but that is NOT what it is built for.” – Albert Einstein

Multiple Interpretation of Risk and Uncertainty

In Uncategorized on March 5, 2015 at 3:28 pm

Risk deals with syndrome of multiple interpretations and boundary less. Through this blog, I would like to clarify few terms associated with risk and uncertainty.  

Risk and loss: We usually relate risk with loss.  Loss is a common experience that can be encountered many times during a lifetime by losing someone or something or that result in disadvantage. A common difference between a loss and risk is former results only in negative consequence while risk may have positive or negative consequences though, people often forget benefits out of taking good risks.

Perils and Hazard:  Hazard arises from the material, operational, or occupational characteristics of an insured property. It is a substance for which there is valid evidence that it is combustible, compressed, and explosive or water (moisture) reactive. Though, a peril is something that can cause a loss. Examples include falling, crashing your car, fire and lightning while a hazard is any condition or situation that makes it more likely that a peril will occur.

A hazard may be Physical hazards, like smoking, or skydiving or Moral hazards (most of which are avoidable), like dishonesty for example burning down the stocks in the godown when your company goes bankrupt to collect insurance money or buying insurance on someone with yourself as beneficiary and then killing them or Morale hazards, like a careless attitude since “insurance will pay for it.” Simply put, hazards are the circumstances or source of potential damage whereas peril is a serious or immediate danger.

Insurance companies deals with small, medium and large risk of individuals and corporate. They use plethora of such terms very frequently which is often confused by many. A most classic example is “what is difference between risk and uncertainty”.  Insurance companies are happy to insure predictable risk which should not certainly happen.  

Interpretation 1:  Unpredictable risk cannot be insured. 

Interpretation 1: Unpredictable risk cannot be insured

Interpretation 2:  An uncertainty is insurable or not? For example natural disaster are predictable and unpredictable both – so, some are insured whereas all cannot be insured.

Interpretation 3: The risk which will certainly occur after a period of time or after an event, is also not insurable.

Interpretation 4: Risk has its own characteristics so do the loss.

Interpretation 5: Insurance is more dependent upon perils though, premium rate varies significantly on the basis of hazards.

There can be many more. Understanding of risk and uncertainty is highly debatable so do its measurability and immeasurability. A possible reason for multiple interpretation can be Risk viewed from multiple perspectives. This makes subject interesting however, it appears more complex if seen holistically.

Does new regulatory bodies FCA and PRA help the insurance regulations?

In Uncategorized on December 9, 2013 at 6:45 pm

Failing to meet its complete objectives, FSA is replaced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in  April 2013 as per the requirement of Financial Services Act 2012. There are a few significant changes made in the Supervisory and Prudential guideline given by  FSA guidelines before 2012 and new guidelines given by FCA and PRA. FCA objective is to secure consumer protection, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers.

Since 2013, there are 4 Distinct Approaches applied in Implementation of Enterprise Risk Management by PRA – Rules, guidance, Single firm Assessment and Assurance.  PRA Approaches are divided among financial services companies into 4 Broad Categories. The approach from small Insurance Companies (Category 1) is very clear; there is no expectation of ERM implementation however the companies are expected to abide by the rules given by PRA. The approach for medium Insurance Companies (Category 2) should work a step ahead and should have their Risk Appetite statement and planning to implement ERM.  From the large Insurance Companies (Category 3), PRA expects them to agree and understand Enterprise Risk Management framework. Nevertheless, Insurance Companies in this category must inform PRA about any risk which has aggregation from Risk Appetite. In the last, from very large Insurance Companies (Category 4), PRA expects to take care of all 3 line of defence as well as to take care of program of continuous Assurance work. It looks obvious that PRA is now able to understand that Prudential Guidelines can’t be implemented in all firms in the same way and considering the problems of Insurance firms in their decisions which shows a positive attitude by the regulator.

Very recently, FCA has published a document on Risk Outlook( Authority, 2013) which focus on different aspect of problems faced by Insurance firms in ERM implementation. According to Solvency II guidelines, the risk management is not a one day process or deadline driven which can be accomplished over a short period of time. Even though, some companies are able to implement but its effectiveness is still questioned by the experts. FCA is now looking for long term solutions and more effective and robust ERM framework rather than showing top records of implementing ERM in black and white. In this Report they try to find out inherent biases and heuristics, inadequate financial capability, conflicts of interest, culture and incentives, ineffective competition, economic and market trends, technological developments, regulatory and policy changes, information asymmetries are the key drivers for conduct of risk. When Insurance firms takes into accounts these drivers into consideration while linking it with business plan can create Embedded risk culture in the organization which will ultimately benefit to Insurance firms and consumers. The recent draft guidelines of International regulations like Conframe may affect the present regulation in UK but subject to acceptability.

A journey from Cadbury, Turnbull reforms to Solvency ii, Industry demands need of regulations on national level stating the expectation from insurance companies rather following distinct guidelines of different regulations.

Owner of my own Risk – Me or others ?

In Banking, Finance, Insurance, Risk Management on February 25, 2013 at 8:11 am

When an individual see the Risk – it looks 4 letter words. It is well said “This will not happen to me”, it is unusual not to avoid it. Actually what is the risk? It is a threat, loss of opportunity, unexpected happening of loss. Who is the owner of the risk – individuals themselves? It is the duty of risk owner is to prevent, reduce, transfer and control the risk.


It is just a Four letter word – RISK

Corporates also own the risk; risk manager owns the risk of each department. He/she may set procedures/systems to prevent/reduce the risk, he may transfer the risk to the insurance companies. Insurance companies owns the risk of various corporates and individuals but here the system works little different. Although insurance companies manage the risk however the risk lies in the hands of insured, It is also in the hand of GOD which can be seen any time in floods, earthquake. Its invisible based on set of calculations and predictions.

These insurance companies retain certain part of the risk in their hand and transfer the risk to the Reinsurance companies. Now situation changes dramatically – Reinsurance companies accepts the risk of same individuals/corporates from Insurance companies without knowing who actually they are, only based on set of terms and conditions and documentation submitted by insurance companies. The ownership of the risk is still in the hands of insured.

The reinsurance companies transfers this risk to Retrocession companies who practically don’t know the country of origin of the insured at the time of acceptance of risk, only a set of group risk based on certain conditions are accepted. The ownership does not change hands, insured still can increase or reduce own risk. Finally the set of risk reached through derivative market eg; CAT bond to the public. Individual own their own risk. “its better not to avoid risk rather deal with that”

Insurance Defined

In Finance, Insurance, Legal on May 3, 2012 at 8:05 am

Insurance is a form of risk management primarily used to hedge against the risk of contingent loss. Insurance is a contract between two parties where in exchange of premium, the risk is transferred from one party to another party.

Insurance classical definition

Insurance is an agreement where, for a stipulated payment called the premium, one party (the insurer) agrees to pay to the other a defined amount upon the occurrence of a specific loss.  The party who pays the amount to the party on occurrence of specified loss is called Insurer. The party who pays a stipulated payment is called Insured. A defined amount which insured pay to Insurer is called Premium.

Financial definition of Insurance

Insurance is the financial mechanism by which cost of unexpected loss is redistributed. Here, loss expenses transferred to insurance pool and loss is redistributed to the members of pool.

We see losses at many stages in our day to day life whether it is corporate or individual. Losses may be of high or low severity, may affect single or group of persons. It may involve single region or multiple region and even countries. Sometimes losses are too low which can be ignored but on the other hand, it can be so severe that it can eat up whole life saving of a person.

For example:

Let’s take an example of Fire insurance pool where losses are redistributed among masses.

In the Mumbai Trombay area, many oil refining and petroleum units have high risk of fire. They transfer their fire risk by paying Rs 50,000 in fire pool. In total 50 units agreed and pool reached to the (Rs 2500, 000). Fire broke out in one of the unit of Trombay area and it affected the one adjoining unit also which resulted loss of Rs 2500,000. Now loss expense of 2 units can be paid from fire insurance pool. If no insurance pool existed, the unfortunate victims will loose 2500,000. Here loss expense incurred by two units will be redistributed among 50 corporates.

Legal definition

Insurance definition under Indian law: “Insurance is legal contract where one party agrees to pay another party an agreed amount to compensate its unfortunate losses.” Here ‘amount’ is called premium and contract is called policy.