Research Paper: Risk and Insurance Management

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[. . .] The third risk acknowledged above is client association risk. For instance, profitable insurance is obtained mainly through the use of insurance managers or dealers. Up till now it is not known if technical progression, e.g. The outcomes of searches just like the one carried out by New York Attorney General Eliot Spitzer, will cause the profitable insurance market to grow into a straight trade market. If it does, then profitable insurance firms will discover themselves contending in an entirely new field where previous dealings may no longer be successful.

Investment Risks

Investment profit hazard creates typical methodical hazards just like those originating from interest rates and the money markets. Nonetheless, as a lot of insurance firms have huge fixed earning assets there is also a component of credit risk linked with an insurance firm's investment case. In this circumstance, credit hazard is described as the probability of a venture defaulting on its loan payments (IBM Corporation, 2006).

Reinsurance Contribution Risks

Credit risk can also be an issue relating to reinsurance donation. If a reinsurance firm is either sluggish to remunerate its claims offerings or not capable of making such remunerations, the consequences on insurance firm presentation and worth as well could be important. The risk obtained a huge deal of community consideration in 2003 because of the remarks made by Berkshire Hathaway Chairman Warren Buffett in one of his globally accepted writings to the investors. Nonetheless, there is one more side to this risk that has not been highlighted in the media or the public i.e. blunders made by insurance firms concerning reinsurance proof maintenance, billing, and bookkeeping. For instance, we have studied cases where insurance firms have not followed reinsurance payment -- they were billed due to insufficient proof maintenance, processes and/or employment. As the quantity of payment billed could be considerable, it is significant to the value of insurance venture that this risk be cautiously administered (IBM Corporation, 2006).

Recovery Risks

The subsequent risk, which is the last one recorded on the money inflows, is recovery risk. Insurance firms are basically in the trade of presuming risks and disbursing out the claims produced from them. So, getting cash from other companies on the claims is not something that happens frequently, but it does happen frequently enough to warrant that insurance firms should administer the risk of not making the best of such chances (IBM Corporation, 2006). The aim of administrating each of the risks highlighted above is to aggrandize the cash inflows of an insurance firm. In the following paragraphs, we highlight the risks a family business must take into consideration when allowing an insurance firm to not only administer but also alleviate its money outflows.

Claim Risks

The biggest insurance money outflow is asserting remunerations, which normally generates three kinds of hazards: (1) disaster risks, (2) preservation risks, and (3) inflation risks. A disaster or calamity in this framework is an intense incident that is not predictable or forecasted previously. Such incidents can produce a considerable amount of damage. This is so because such unpredictable incidents cannot be sufficiently priced due to their unpredictable nature. There is also a danger that calamities will not be administered efficiently by the claims' expert branches once they take place, which can be important as calamities take place more commonly than many may understand. The next risk linked with claims remuneration or finances is preservation risks. This risk is the probability that an insurance firm's approximates of claim remuneration will be insufficient to wrap claims when they are remunerated in the future. This risk can be considerable as it was, for example, in 2003 when it was approximated that the insurance business was under-reserved roughly by $30 billion (IBM Corporation, 2006).

The third and last hazard linked with claims remuneration is inflation risk. There are two categories of inflation that precede a hazard to the sufficiency of insurance preserves: cost inflation and communal inflation. Communal inflation can be described as a boost in insurance claims costs because of senior adjudicators' decisions, increased adjudication rewards, violent regulatory actions, and unfavorable case rule growths amongst others. All of these types of inflation risks can be a tall hurdle to cross when settling the sufficiency of the existing finances preserved to disburse claims in the upcoming time. This is one of the main reasons why each must be efficiently administered.

Interest and Dividend Risks

The subsequent risk recognized from the discussion above was linked with profit and dividend remunerations. Because insurance endorsements can be believed to be a type of debit, 13 insurance firms characteristically make use of the customary types of debt opportunities like the use of bank mortgages, the issues of bonds amongst others. The similar trends can be seen with regards to the dividend remunerations; such remunerations are often conventional as they are supervised by insurance managers and compared/differentiated with the dividend remunerations of parallel ventures. It is important to note here that if an insurer takes on high debts or dividend remunerations, it could create significant solvency concerns, which is what happened for the Reliance Insurance Company (IBM Corporation, 2006).

Reliance utilized debt opportunities too assertively, and had a very moderate dividend strategy until May 29, 2001. It was in 2001 when Reliance was put into restoration by the Pennsylvania Insurance Department. It turned out to be the biggest insurance firm fiasco in United States' studies of past insurance and debts events. Reliance had difficulties as well as a violent assets arrangement and moderate dividend strategy, certainly, but these issues did enhance that venture's solvency risk.

As the risk of disbursing too much in dividends is quite noticeable, disbursing scanty amount in dividends could too be believed as a significant risk. Ventures struggle each day on the market for both clients and shareholders. Shareholders will only assign money to an asset if the return they suppose to obtain recompenses them for the asset's approximated risk. Dividends remunerations are a part of the asset return. These remunerations or returns can sometimes be an important factor, and simultaneously be a competitive risk that could occur if an insurance firm's dividend strategy is more conventional than the investment society believes it should be (IBM Corporation, 2006).

Tax Risks

Together with duties on possession and earning, insurance firms are often charged a premium tax. As insurance is controlled at the national position, it is critical that insurance firms fulfill all tax parameters, for the consequences of not fulfilling these parameters can prove to be extensive. Likewise, since the insurance business is so profoundly axed that it becomes very important that its tax scheduling is adequately inclusive and make sure it is not disbursing more in taxes than it needs to (IBM Corporation, 2006).

Cross Discipline Risks

There are also risks that expand across an insurance firm into a range of regulations. We recognized four such risks: (1) overseas trade risks, (2) supervisory risks, (3) human resource risks, and (4) authorization risks. Starting with overseas trade risks, if an insurance firm guarantees strategies, regulates claims, reinsures risks or invests in securities beyond its state it comes across doubtful and unstable circumstances with regards to the overall worth of the price of overseas trade (IBM Corporation, 2006).

Supervisory risk is the hazard that insurance supervisors will limit or take charge of insurance businesses. This entire approach is founded on the supervisors' observation of an insurance firm that is incapable of assembling its responsibilities and promises in accordance to the demands of its shareholders. Supervisory risk in this framework often results from a junction of issues such as the devaluation of asset portfolio, unbeneficial underwriting as well as incompetent claims administrations amongst others. The cases of Reliance and PHICO mentioned previously are intense cases of the possible situations that can occur when supervisory risks are not suitably administered. Nonetheless, it must be kept in mind that supervisory risks can also create high prices from regulatory audits as well as answering regulatory questions and so on, which like all expenses must be administered professionally if asset worth is to be increased in the family business sector (IBM Corporation, 2006).

Risk Management Techniques

Vigorous risks administration needs two constituents. First of all, underwriters must preserve adequate technological assets and money that is proportionate with the firm's risk situation and outline. Furthermore, the supremacy arrangement must include the rights and profits of all stakeholders as well as all the strategists. In urbanized insurance markets the well considered Canadian managing approach is frequently witnessed as the best. This has worked mainly through boards and higher-ranking executive for over 20 years (coming up from the supremacy fiascos in union life and a few other minor underwriters in the 1980s) and greatly influenced the changes to the Australian supervisory government that took power after the fiasco of HIH in the year 2001. There are quite a few regulatory authorities present in the modern era coming up with new initiatives, like the Framework Directive which presents the Solvency II (SII) government in the European… [END OF PREVIEW]

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APA Format

Risk and Insurance Management.  (2011, April 23).  Retrieved May 21, 2019, from

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"Risk and Insurance Management."  23 April 2011.  Web.  21 May 2019. <>.

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"Risk and Insurance Management."  April 23, 2011.  Accessed May 21, 2019.