Risk Management Framework for Insurance Industry

The concept of insurance is built around risk-financing. However, the insurers are prone to multifarious risks themselves, which emerge and evolve overtime. It has therefore become vital to identify such risks, their intensity, the key impact areas and the necessary precautions that must be in place to mitigate them. This paper attempts to break down the insurance process into different stages to detect the risks and understand their intensity using a 5×5 Risk matrix. The Risk matrix uses probability and severity criteria to classify risks into low, moderate, high and extreme risk areas. The severity criteria was based on assumptions about whether the parameter under consideration had insignificant, minor, moderate, major or severe impact on the business. The probabilities were assigned based on customer responses to the survey and were classified into rare, unlikely, possible, likely and almost certain based on percentage responses. If further understanding was required beyond the risk matrix then Chi-square tests of association (confidence level 95% and significance level 5%) was performed to indicate if the variables had any association between them so that they can be predicted in advance. Lack of association indicated that uncertainties were high due to risks. The descriptive research design and simple random sampling method were used to collect data from a total of 79 respondents from Chennai and Bangalore cities. The primary data was collected through closed ended questionnaire and secondary data was also utilized. Descriptive and Inferential statistics methods using SPSS were employed and the data collection period was from 15th April to 30th April 2020. The research identified the presence of Business Risk, Communication Risk, Actuarial Risk, Reinsurance Risk, Liquidity Risk, Legal Risk, Operational Risk and Environmental Risk. The factors creating the risks in different stages of the insurance process was identified along with the areas they impact and the scale of impact. Suggestive measures to mitigate them was proposed to counter the risks. There can be no solution that will be effective permanently. It is therefore recommended that risk monitoring committees perform regular assessments annually and design and modify mitigative measures appropriate to their needs.