Strategic risk management in insurance

Strategic risks in insurance

The potential for companies and industries to be disrupted and perhaps even displaced by transformational trends in technology, the economy, and consumer preferences is on the rise in today’s rapidly evolving, increasingly digitized economy. Insurance is facing such strategic risks—emerging threats that can undermine the core assumptions of a company’s value proposition and operations.

Unlike most other industries, risk management is already a core function of insurance companies and many carriers have already adopted enterprise risk management (ERM). However, these programs are not traditionally designed to address strategic risks that are disruptive to an insurer’s value proposition or business model, and which are generally difficult to foresee, measure, and minimize.

To more effectively cope with game-changing technologies and new competition from nontraditional sources, insurers should consider adopting strategic risk management (SRM) as a holistic framework to not only help them manage the potential downside of disruptive risks, but also perhaps achieve faster growth by better preparing them to capitalize on the resulting opportunities. While the disruptive threats carriers face may be transformational, a transition to SRM actually represents a natural next step in an insurance company’s risk management maturity curve.

SRM in insurance

Carriers that establish SRM programs should enjoy a number of advantages over their non-SRM competitors. Insurers should therefore start thinking of ways to develop a model framework that equips them with the tools, techniques, and skills to both mitigate and exploit the dual nature of strategic risks. In order to put SRM into action, insurers may want consider the following steps as part of an SRM framework:

Establish an SRM capability

• Identify a leader
• Map the implications of strategic risks with the company's risk appetite
• Leverage risk sensing tools to generate early warning signals for emerging strategic risks

Integrate SRM into risk-sensing

• Build or fortify a risk sensing system to help the C-Suite and board of directors remain on top of the key strategic risks facing the company

Prepare a scenario based action plan

• Prepare an action plan formulated by a newly constituted strategic risk oversight committee, with input and approval from senior management and board of directors
• Conduct periodic mock drills to test preparedness

Leverage cognitive tools to enhance decisions

• Use computer-based simulation models to help executives test the strength of their decisions under various scenarios
• Power a continuous feedback loop to highlight the cognitive traps that can hinder strategic risk assessments 
• Implement remedial programs that enhance decision making and minimize influence of biases