Insurance Risk Management

Insurance Risk Management, de jargoned or decoded simply means creating a back-up plan for an unforeseen, unfortunate event. Let us understand Insurance Risk Management from the eyes of a common man and an insurer

Let us take Manas, a 40 year old married, working male with wife, two young children and aged parents dependent on him. He also has liabilities like a home loan and a car loan to be serviced in addition to the daily expenses.

He plans to provide and support his dependents and create wealth over a period of time. One of the nagging fear he has is if his plans gets derailed because of an unforeseen event, like sickness or calamity or even loss of a job for any reason.

He is the only source of livelihood for the family. His Risk management plan will involve buying a health insurance cover for self and family. He will need a life insurance cover, to start with covering his loan liabilities so that a medical exigency or even risk of untimely death does not topple the family’s financial wellbeing. This includes taking a property and motor insurance.

The backup plan for a job loss could be to upgrade his skills and knowledge through a course or even starting a parallel business offering an additional stream of income to help him sail through critical years of wealth building when he helps take the family boat across. The back-up plan for a job loss is not part of overall Risk Management though not Insurance Risk Management.

The above explains, how Manas should go about with a contingency plan in Life and this applies to every individual depending on where the concentration of Risk lies. The simple principle of Risk management is how to make good the loss to a large extent so that the financial shock on the loss is minimized and life could move on.

How does an insurer manage its risk especially when many lives approach the insurer to take care of their health and life. An insurance company works on the principle of “pooling of risk” wherein the loss of few unfortunate is borne by the many who are contributing to a pool. The insurer is able to predict the likely losses every year with a fair precision due to the Law of Probability which works when large numbers are involved. Over a period of time, the claims experience adds to the refinement of the Claims probability so that he is able to price for this expense in additional to the other expenses of running a business.

The insurance company on his part also ‘transfers” a portion of his risk to the “reinsurer” who then contributes to the claims expenses too. In this manner, the insurer also manages his Risk of likely high claims.

Risk Management in Insurance is a comprehensive topic and we will be getting in to the details through a series of articles that will follow soon from our end at AdWise Assure Pvt Ltd.

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