Insurance Companies Type of Risk,Assessment and Mitigation

1. 1st Member Name: Muhammad Asad Siddiqui (REG 59523)
2nd Member Name: Muhammad Danish ( REG 55023 )
Subject: Risk Management
Class: MBA
Teacher Name: Sir Haseeb Shah
Topic Name:
WHAT TYPE OF RISK ARE FACED BY INSURANCE COMPANIES AND
HOW ARE THEY MEASURED/ASSESSED AND MITIGATED?

2. RISK MANAGEMENT
What is Insurance?
History of Insurance Companies in Pakistan.

3. Insurance Companies in Pakistan
The insurance industry in Pakistan has classified into non-life and life insurance
providing companies that are as follow:
Non-Life Insurance Companies
S. No. Name of Companies S. No. Name of Companies
1 Adamjee Insurance Co. Ltd. 15 Excel Insurance Co. Ltd.
2 Alfalah Insurance Company Ltd. 16 Habib Insurance Co. Ltd.
3 Allianz EFU Health Insurance Ltd. 17 IGI Insurance Ltd.
4 Alpha Insurance Co. Ltd. 18 Jubilee General Insurance Company Ltd.
5 Asia Insurance Company Ltd. 19 New Hampshire Insurance Company
6 Askari Insurance Co. Ltd. 20 Premier Insurance Ltd.
7 Atlas Insurance Limited 21 Security General Insurance Co. Ltd.
8 Century Insurance Co. Ltd. 22 Sheehan Insurance Ltd.
9 Chubb Insurance Pakistan Ltd. 23 Sindh Insurance Ltd.
10 Cooperative Insurance Society of Pakistan Ltd. 24 SPI Insurance Company Ltd.
11 Crescent Star Insurance Company Ltd. 25 The Pakistan General Insurance Co. Ltd.
12 East West Insurance Co. Ltd. 26 TPL Insurance Ltd.
13 EFU General Insurance Ltd. 27 UBL Insurers Ltd.
14 Universal Insurance Company Ltd. 28 United Insurance Co. of Pakistan Ltd.

4. Life Insurance Companies
S. No. Name of Companies S. No. Name of Companies
1 Adamjee Life Assurance Company Ltd. 5 IGI Life Insurance Ltd.
2 East West Life Assurance Company Ltd. 6 Jubilee Life Insurance Company Ltd.
3 EFU Life Assurance Ltd. 7 State Life Insurance Co. of Pakistan
4 TPL Life Insurance Ltd.
Reinsurer Companies
S. No Name of Companies
1 Pakistan Reinsurance Company Ltd.
Insurance Companies in Pakistan

5. Risk Faced by Insurance Companies
There are following risk confronted by insurance companies in Pakistan
that are as follows:
Technical Risk
Credit Risk
Systematic Risk
Reinsurance Risk
Default Risk
Misconduct Risk
Operational Risk
Cyber Risk

6. Technical Risk
 The technical risk, associated with the inaccurate estimation (probability
of occurrence) of the risk event, is the main risk factor for an insurance
company, given that the inaccurate estimation of risk leads to inaccurate
calculation of the premium rates.

7. Credit Risk
 Credit risk is associated with loans extended by an insurance company
to its policy holders or to its subsidiaries. Generally, such loans are fully
secured against the underlying policy.

8. Systemic Risk
 The market risk or the systemic risk is related mostly with the investments
made by the insurance companies.
 Riskier investments can potentially affect the claim repayment ability of an
insurance company.

9. Reinsurance Risk
 It has described as a phenomenon in which insurance companies purchase
insurance policies from each other pool and share the risk within the
industry to limit total loss within the industry.
All insurance companies in Pakistan are subjected to provide their 35%
business to Pakistan Reinsurance Company in the practice of cession.

10. Default Risk
There is only one reinsurance company in Pakistan hence there is although
presence of reinsurance arrangement within the country but it subjected to
default risk due to single reinsurer.
It has also found that mostly local firms have used services from foreign
reinsurer to mitigate the risk along with the presence of only local
reinsurance company i.e. Pakistan Reinsurance Company Ltd.

11. Misconduct Risk
 Misstatement of financial results usually results in hazardous risk to
confidence of investor on the business.
 It reflects gross negligence and inappropriate disclosure of financial results
hence leads to systemic risk within the industry that reveals lack of strict
regulation from regulatory bodies.

12. Operational Risk
 The insurance company faces operational risk in the course of its
business, which arises from different factors such as business practice,
fraud (moral hazards) and business disruption or system failure.

13. Cyber Risk
The era of digitalization i.e. branchless banking has resulted in a rapid
expansion of insurance industry in Pakistan therefore significant threat to
data of customers with insurance company hence a cyber-attack may result
in direct impact on insurance company hence found with loss of
information and may result in serious threat to business sustainability and
customer’s confidence on business.

14. Risk Assessment
Insurance companies use a methodology called risk assessment to
calculate premium rates for policyholders.
Insurance underwriters carefully balance the insurance company’s profitability
with your potential need to use the policy.

15. The underwriting process will differ from insurer to insurer, depending on the
level of risk they are prepared to accept. Terms and conditions may be applied to
policies to further homogenize the risks by removing particular events or
circumstances under which claims would be paid.

16. Insurance Premium
An insurance premium is the amount of money that an individual or business
must pay for an insurance policy. The insurance premium is considered income by
the insurance company once it is earned, and also represents a liability in that the
insurer must provide coverage for claims made against the policy.
Policyholders are often given a number of options when it comes to paying an
insurance premium. Some insurers allow the policyholder to pay the insurance
premium in installments, for example monthly or semi-annual payments, or may
require the policyholder to pay the total amount before coverage starts.
Insurance premiums may increase after the policy period ends. The insurer may
increase the premium if claims were made during the previous period.

17. Risk Measurement Models
A risk measure shall be deemed to be coherent if it satisfies the
following properties.
SUB-ADDITIVITY
 Combining two portfolios should not create more risk. When
portfolios of risk are brought together, there may or may not be
some risk diversification benefit.
Risk (A+B) <= Risk (A) + Risk (B)

18. Risk Measurement Models
MONOTONICITY
 If a portfolio is always worth more than another, it cannot be
riskier. Consider company ABC – if one strategy gave modeled
financial results better than another for any given return period,
the risk as measured by a coherent risk measure, must be better.
Risk (A) <= Risk (B) if A >=B

19. Risk Measurement Models
TRANSLATION INVARIANCE
 Adding a risk free portfolio to an existing portfolio creates no
change in risk. For example, when focusing on capital adequacy,
adding additional capital to a company will not change the
portfolio’s volatility (although it will reduce the risk to
policyholders).
 The financial result will be improved by this amount in all
outcomes.
Risk ( A+ k) = Risk (A) + k ,for any constant k

20. Moral Hazard
Moral hazard is the risk that the behavior of policyholders changes once they
have entered into an insurance contract in a way that makes the risk event more
likely to happen. For example, a car owner may drive less carefully once they
have insurance that passes the risk of the car being damaged on to an insurer.
Moral hazard can result in more claims than the insurance company expected
based on its underwriting and could result in premiums increasing for all
policyholders if it is not managed effectively. This is why it is important for the
terms and conditions of insurance contracts to be tightly worded.

21. Risk Mitigation
An insurer can take a number of steps to lessen the risk associated with its
business.
These include the purchase of reinsurance, securitization of a portion of its asset
or liability portfolio, hedging of financial guarantees using derivative instruments,
use of product design to pass on the risk to policyholder as well as active risk
management to the extent that these measures effectively reduce a company’s risk.

22. Risk Mitigation
Avoidance of large single losses (e.g. liability claim)
 Many risks in insurance have very high payout limits, some may
even offer unlimited cover. A simple example of such use of
reinsurance is motor insurance. Liability claims can be very large,
running to millions of pounds, Euros, dollars etc.

23. Risk Mitigation
Smoothing of results
 The principle whereby reinsurance covers the larger risks or
accumulation of smaller risks above certain limits helps to
achieve a smooth development of accounts year-on-year
especially when the portfolio is relatively immature.
 A premium is paid to mitigate these fluctuations and the net
result is more predictable for the insurer, a predictability that
may also be more acceptable to shareholders and regulators. Stop
loss is a form of reinsurance that is used for these purposes.

24. Risk Mitigation
Availability of expertise (new or unusual risks)
 When an insurer is adopting a strategy that will take it into new
risk areas where it has little previous experience, the reinsurance
broker can sometimes help with rating, underwriting and claims
management.

25. Risk Mitigation
Increasing capacity to accept risk (singly or cumulatively)
 An insurer may be reluctant to accept, or incapable of accepting,
particular risks by sector or by volume. An insurer may also be
reluctant to accept a particular risk if it would be exposed to an
accumulation of risk as a result.
 Reinsurance cover can obviate this situation. The solvency
requirements for a particular line of business are normally reduced in
line with the proportion ceded, though this may be subject to an
upper limit.

26. Risk Mitigation
Financial assistance (new development, mergers/acquisition)
 Reinsurance funds are available to assist financially with
particular business propositions. Where a particular distribution
strategy would involve substantially more cash outflow in the
initial stages than premium income, reinsurance commission may be
available to “factor” future surplus streams, i.e. lend now
against the predicted future flows of premiums less expenses and claims.

27. Risk Mitigation
Hedging
 Hedging is a strategy designed to minimize exposure to an
unwanted business risk, while still allowing the business to profit from a
n investment activity.
 A natural hedge is an investment that reduces the undesired risk
by matching cash flows, i.e. revenues and expenses.
 For example, writing both life insurance and life contingent
annuities for similar groups of policyholders may help to provide a
hedge against the impact of improving mortality.

28. Reinsurance
It is simply defined as Reinsurance is insurance for insurers.
Reinsurance reduces an insurer’s risk of loss by sharing the risk with one or
more reinsurers.
For Example: The reinsurer compensates the insurer for its share of the risk.
The financial compensation that would be required in the event of a commercial air
line plane crash, could be too great for a single insurer, so reinsurance is sought to
share the loss.

29. Uncertainty Factor
There are a number of factors adding to the uncertainty of payment of insurance,
including, but not limited to:
The willingness of the insurer to pay in a timely manner.
The ability of the insurer to pay in a timely manner.
The ability of the insurance company to identify, analyze and report the claim in
a timely manner.

30. Controls for Higher Risk Situations
Insurance companies and intermediaries should implement appropriate policies, procedures
and controls to mitigate the potential money laundering and terrorist financing risks of those
customers, products and countries that they determine pose a higher risk. Risk mitigation
measures and controls may include:
A system to identify and monitor higher risk customers and transactions within business lines
across the company.
The measures should be directed toward strengthening the knowledge that the life insurance
company or intermediary has about the customer with whom they are doing business, that they
understand the true source of funds flowing through the product, and that they understand what
usual and customary behavior will look like for the customers purchasing that product.
Increased monitoring of transactions (frequency, thresholds, volumes, etc.).

31. Conclusion
Ultimately, risk management can be tied directly into capital allocation. If
products are required to hold capital in proportion to their risks, then consistent
risk-adjusted returns can be measured. Important part is that Hedging and
reinsurance are two powerful risk management tools.
Also risk confronted by insurance firm along with models followed in firms to
determine relevant weightage of risk factor to determine premium charged to
policy holders to offer with an competent product offers.