Enterprises have been managing risks for as long as they have existed. It is a natural part of doing business as one can decrease the likelihood but never totally prevent some disasters from happening. The name for this strategy is called enterprise risk management or ERM. It is primarily a plan-based method of risk management that identifies and addresses anything that may potentially harm and interfere with usual business operations. Normally, many corporations have managed risks by purchasing insurance policies to get some form of protection or compensation in case anything ever goes wrong. However, who is doing ERM for insurers, and what can these companies stand to gain from having ERM?
Why ERM Is Important for Insurers
The silo approach to sharing information across an insurance company is no longer effective. In theory, it does seem like limiting the amount of information disseminated between departments can decrease the risk of problems with claims and underwriting. However, many processes involved in insurance are strongly correlated and cannot operate independently from each other. This is why insurance companies need some form of ERM.
Moreover, insurance companies are also affected by financial meltdowns and pandemics. These situations can lead to unexpected exposure to great risk. Without a plan on how to handle and respond to such risks, insurance companies can potentially lead their workers, stakeholders, and clients to financial ruin. Over the last few years, many regulators and governing bodies in the industry have made it a requirement for all enterprises, even insurance companies, to be aware of their risks and know how to properly handle them. That said, having an ERM program is no longer just an option for insurers anymore, it is an industry standard.
Benefits of ERM to Insurers
Since ERM varies by industry, it has specific guidelines that need to be met when it is applied to an insurance company. It also provides a wide array of benefits. Firstly, the ERM program can provide a clearer picture of the insurer’s overall risk profile, one that considers the relationship between the products and services of the company. This means that a thorough and integrated assessment of all material risks from the company’s business operations has to be done prior to this.
Secondly, the ERM program makes it easier to understand how to properly address any potential risks across the company. This is because it breaks down the risk profile in a realistic manner so an objective and consistent approach to risk management can be made. Plans for addressing risks can be aligned with the insurer’s business strategies and risk appetite. These, along with the company’s strategic goals can be used as common parameters to assess a number of risks. Lastly, an ERM program can help classify possible risks as either dangerous or calculated. This allows the insurance company to eliminate any possible surprises while continuing to seize opportunities as they go along.
Major Considerations During ERM Implementation
Of course, insurers still need to exert some caution when developing an ERM program. For one thing, it is not meant to be seen as a project with a clear start and end. ERM is an ongoing process that always has to be monitored and improved. Moreover, ERM plans should be informed by the past but should be strategic and forward-looking at all times. It should take existing knowledge and data into account without discounting that there will always be unknown circumstances that may come up.
With that said, everyone in the company should actively participate in ERM, from top management to rank and file. While a chief risk officer and their team can take charge of it, risk can still affect different business units across the company. It is in everyone’s interest to observe ERM procedures at all times. The ERM program must be an integral part of the insurance company. Otherwise it is not as effective.
Nowadays, there are more factors that could potentially harm an enterprise. Aside from fires and natural disasters, companies also have to safeguard their data and reputation. With the rise of the internet and digitized processes, an ERM program becomes a requirement for any financial institution, even insurance companies. In addition to defining the risk profile of the insurer, ERM programs provide a framework that experts can use to find out how to assess and address different risks. Factors like the insurer’s goals, business operations, and risk appetite must be considered in ERM.
Additionally, an effective ERM program is carefully made and continually adjusted as it takes different variables into consideration while always being future-oriented. Of course, this is a meticulous task that has to be built and developed incrementally. To expedite the process while ensuring quality control, it helps immensely for insurance companies to digitize their processes. The initial assessment itself can already be a lot to do manually and is better done via cloud deployment. To help things along, insurance companies can hire digital transformation experts to modernize their processes.