Dada Adefolami

By Dada Adefolami

Insurance is a financial risk management tool in which the insured transfers a risk of potential financial loss to the insurance company, mitigates it in exchange for monetary compensation known as the premium.
Insurance policies, a contract between the policyholder and the insurance company, are of different types depending on the risk they mitigate. Categories as follow: life, health, motor, travel, home, rural, commercial and business insurance.

The global insurance market is valued in the trillions of dollars. At a macro level the industry is represented by reinsurers – the companies that insure the insurance companies. In a simplistic sense reinsurers set aside capital to cover catastrophic world events such as September 11, the 1906 San Francisco earthquake and Hurricane Katrina to name but few. Following these events insurers provide the liquidity needed to repair damaged assets and infrastructures quickly and help economies to recover.

Spreading the risk among the many, reinsurers seek to recover capital disbursed in claims by raising insurance premiums. In more recent times, with the innovation in capital market products, the macro insurance market has been relatively stable.

CORPORATE INSURANCE
Insurance is one method a corporate uses to manage risk by transferring it to another party. Buying corporate insurance is a complex task, particularly for international firms. There are many individuals in an organization that directly or indirectly influence an insurance strategy. Because everyone looks at risk differently, it can be challenging to gain consensus on what an insurance programme should cover. There is often a conflict between group and local operations.

INSURANCE STRATEGY
When developing a corporate insurance strategy there are a number of factors to consider, as follows.

GOVERNANCE CHALLENGES
There is a growing trend in non-financial industries to appoint a chief risk officer (CRO), an individual who is a generalist in nature and often accountable directly to the board. This may lead to a clash of authority with the audit committee, which challenges the adequacy of internal controls.
Often the individual responsible for insurance has inconsistent reporting lines – some report to treasury and others to finance. Insurance renewals are often a challenge, collating risk data for insurers from multiple management reporting sources both financial and non-financial.

Informal internal networks for exchanging experiences between insurance professionals often promote the benefits of an insurance strategy.

MAPPING RISKS TO INSURANCE NEEDS

A corporate collects an immense amount of risk data, ultimately consolidated, sorted and ranked in a risk register as a greater or lesser threat to the business.

Many insurance professionals benefit by leveraging existing strategic, financial, and operational and hazard risk information. They map the effectiveness of current insurance arrangements or identify and challenge areas where insurance is available but not used.

Analyzing historical own risk data provides incredible insight when marketing to insurers. It removes insurer uncertainty, often reducing premium price.

FINANCIAL TOLERANCE
Premium pricing often improves when a corporate accepts a portion of the risk – i.e. a deductible or retention. It is wise to consider the financial impact on a business of including the effect to key analyst ratios at certain levels of retention. Many businesses undertake both consolidated and operational loss event scenario testing to assess the impact. By doing so risk retention levels are set that optimize the insurance market transfer point.

Insurers often offer competitive terms to win new business where the amount of risk retained by a company does not influence the premium price. If the creditworthiness of the insurer is acceptable, a business is better transferring risk even though financially it could absorb it.