Question

Discuss the importance of establishing an effective risk management policy in an insurance company giving one example of a risk management strategy used by insurance companies.

Answer 1

The following part of the answer focus on the importance of implementation of an effective risk management policy in an organisation operating in the insurance sector.

a. Implementation of risk management policy in an insurance company is important because it helps the organisation to achieve the objectives and it also helps in increasing commercial effectiveness.

b. In order to avoid any kind of financial crisis, implementation of risk management policy in an insurance company is important.

c. An insurance industry is subject to any kind of non-financial or financial risk. Therefore, implementation of an effective risk management policy is of utmost importance.

The following part of the answer focus on a Risk management strategy that is generally adopted by several insurance companies

Risk transfer is one of the major strategy of risk management which is adopted by several insurance companies. When a pure risk is shifted contractually from one party/entity to another it is known as Risk transfer. In an insurance company when a person buys any insurance policy then the risk of loosing or loss gets transferred from the holder of the policy to the insurer.

Furthermore, if a person buys a life insurance policy from a particular organisation, then the organisation accepts to take the risk and for accepting the risk, the organisation charges a certain amount of premium. Therefore, it can be said that the nominee of a person who has a life insurance from an XYZ company gets a certain amount of money from the organisation in case of an unfortunate incident like death.