What is insurance & risk management?
The transfer and management of risk is a practice which can be traced back to the ancient world. Over the centuries it has evolved to become an integral part of modern business and a way for us to obtain financial coverage in the event that something goes wrong and imposes financial strain. Nowadays there’s no end to the general insurance policies on offer for anything like cars, homes, gadgets, pets and jewellery, to life insurance. Insurance and risk management touches a business at every level.
But how does insurance work? Well, in layman’s terms insurance boils down to a contract (known as a policy in this sense) that sets out an agreement with terms to cover an individual or company financially for any damages or losses – if and when they incur. The amount of money the insurance company agrees to pay out is known as a premium. It sounds pretty straight forward…
In practice however, there is a lot of research, investigation and negotiation that occurs with each party in the run up to a policy confirmation. Professionals such as insurance underwriters and actuaries must assess the risks and probability of an event occurring using complex statistical models. They look at the frequency of similar events and averages for insurance pay outs for the event in order to suggest a premium price. It’s all about establishing the likelihood that something damaging to the business will happen, and the potential costs involved if it does occur. A tricky business!
And there is even more to be done when a claim is made. With some premiums adding up to substantial amounts of money, it’s not unheard of for people to try and put in fraudulent claims...so there are a number of investigatory roles in insurance too that aim to either confirm or disprove the validity of a claim before the insurer hands over any money.
There are several companies in the insurance industry that work on behalf of potential policyholders too. They are known as insurance brokers, and act as a kind of middle man to get the best deals for policyholders. Top negotiation skills are a must in this line of business!
On the insurance side of things, this industry is also concerned with reinsurance. This is when insurance companies themselves purchase insurance policies from other insurance companies to diffuse the financial risk on their part regarding the type of claims they might receive. It’s part of a risk strategy…
So what about risk management? Well, whatever the business function, markets a company might invest in, and projects and investments they undertake, there will always be some element of risk involved. This is the nature of the business beast.
There are different types of risk management. Some roles could focus on what’s known as operational risk, which focuses on a business’s internal processes, procedures, technology and resources (such as staff). Experts such as analysts and consultants in operational risk will make various assessments to determine potential operational risks in a company and suggest ways to minimise these risks.
Alternatively, some analysts, actuaries and consultants specialise in financial and market risk, using their mathematical and statistical analysis abilities to help make predictions for how a market may behave, and provide investment guidance accordingly.
There is also credit risk management to consider. Credit risk management concerns the risk that a borrower will not be able to repay a loan or make repayments on a fixed income agreement – like a bond for instance. Research roles for banks and financial firms involving plenty of data analysis and calculations of credit risk are available here. You could work for a credit rating agency, undertaking data analysis and calculating the credit ratings of potential investments for investors or for individuals who wish to know what their credit rating is.
Why is insurance & risk management important?
Accidents do happen; and when they do they can be extremely costly! Whether it’s a fall that stops someone from working for a significant amount of time, or a fire that destroys a whole office building, money is needed to cover damages and losses. Insurance and risk management helps businesses to minimise the overall impact when eventualities do occur.
It’s just as essential for the insurance companies themselves! It allows them to spread their business and enables them to agree bigger policies. An insurance company that is unable to pay premiums for claims is in a pretty sticky situation!
As for risk management, it really is at the core of modern banking, business and finance. Risk strategy has to be a cornerstone of wider business strategy and investments, and plenty of tough lessons have been learned from the financial crisis which means that risk management plays a key part in banking practice.
Areas of insurance & risk management…
Reinsurance – This is a practice that all insurance companies undertake, in which they themselves take out insurance policies with other insurance companies. It’s a risk management tactic with the aim of covering themselves against potential claims. Some companies will specialise purely in reinsurance!
Underwriting – After an application for an insurance policy is received, it’s the job of an underwriter to assess it, carry out any necessary research and analyse the potential risks involved. This element of insurance involves a lot of assessments and use of the findings to either reject an application or draw up a quote for the premium and terms and conditions for the insurance policy for consideration. They negotiate with an insurance broker or applicant accordingly.
Claims – Whenever a claim is made to an insurance company, it will go through a multitude of different procedures before any money can be released to the claimant. The insurance company wants to determine whether the policyholder’s claim is genuine or whether anything untoward has transpired before it acts. Roles in claims call in claims specialists and legal expertise.
Loss Adjustment – Loss adjustors are the sleuths that evaluate the legitimacy of each claim. They represent an independent body in the claim process and are hired by insurance damages and loss. On-site inspections in order to get to the root of what has happened, how it has happened, and assess the extent of the damage in order to tell the insurance company whether the claim is valid and if the claimant is entitled to the agreed premium. Further investigations are carried out if there is suspected fraud.
Risk Management – Experts in risk management identify and assess the probability and impact of various eventualities, for example financial risks such as a recession, accidents, delays in product development and even natural disasters. Companies listen to their advice on how to avoid these risks if possible, and the most appropriate way of minimising their impact for if and when they occur.
Insurance Brokerage – The primary service insurance brokers provide is advice for clients and potential policy holders on what they’d like to insure and the packages they should take out to do so. They don’t work for insurance companies, rather they are, at times, huge companies themselves that negotiate on packages; mostly for generally insurance purposes like coverage for property.
Handling and investigating claims once they're made.
Finding the most suitable insurance provider and policy for your client!
Validating insurance claims and ensuring compensation is sufficient!
Insuring the insurance companies themselves.
Preventing losses and mitigating damages to firms.
Reviewing, assessing and determining how to insure!
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