In: Finance
Please write an essay containing at least 300 words about the tools of risk management for insurance companies.
Thank you
ps:Thats all my teacher give us so ı dont know anytihng about it. Hope you guys can help.
Managing pure risk entails the process of identifying, evaluating, and subjugating these risks—a defensive strategy is to prepare for the unexpected events. The basic methods for risk management are — avoidance, retention, sharing, transferring, and loss prevention and reduction. — These can apply to all facets of an individual's life and can pay off in the long run. Below are some of prominent methods and how they can apply to the management of risks.
1. Avoidance – Avoidance is a method for mitigating risk by not participating in insurance activities that might cause financial distress in the long run. Or death. For example underwriting insurance to a smoker can prove to be an expensive affair since smoke carries the risk of damaged lungs, cancer and other respiratory decease. Therefore avoiding issuing an insurance is the right approach while dealing with a smoker alternatively a high amount of premium can be charged from the smoker compared to non-smoker.
2. Sharing risk – An insurer can get re-insurance done in case of large risk involved. This not only shares large potential loss with other insurer but also share some of the premium it has received. Thus give more risk bearing appetite to the lead insurer.
3. Establish a risk management capability – This involves mapping the implications of strategic risks with the company's risk appetite and leveraging risk sensing tools to generate early warning signals for emerging strategic risk.
4. Integrate risk management and risk sensing - Build or fortify a risk sensing system to help the Board remain on top of the key risks areas and their mitigating tools.
5. Prepare a scenario based action plan - Prepare an action plan formulated by a newly constituted strategic risk oversight committee or board, with input and approval from risk managers, senior management and board of directors. It is also pertinent to conduct periodic mock drills to test preparedness and do root cause analysis in case of failure of any tests.
6. Leverage cognitive tools to enhance decisions - Use computer-based simulation models to help executives test the strength of their decisions under various scenarios. Provide a continuous feedback to highlight the cognitive traps that can hinder strategic risk assessments and implement remedial programs that enhance decision making and minimize influence of biases