Insurers might be forgiven, in light of recent events, for thinking that the world has become a more risky place.? Natural disasters ranging from the Japanese earthquake and tsunami to Hurricane Sandy have demonstrated the destruction that nature can wreak.? As if natural disasters weren?t enough of a problem, property and casualty insurers must also address new categories of risk, ranging from cyber crime to sophisticated automobile claims fraud, carried out in some cases by organized crime rings.
Since the creation of the first actuarial table, insurers have used some form of analytics to assess the levels of risk their clients face and to determine how to manage such risk.? In the last few years, however, risk analytics have become much more powerful, driven in part by advances in areas such as modeling and testing, but also by the explosion of data available for analysis.? Both P&C and life insurers now typically have access to quantitative and qualitative tools and techniques designed to estimate the impact and frequency of specific business risks and to deliver positive business outcomes.?
Risk analytics can augment more traditional reporting, business intelligence and data warehousing capabilities with newer techniques in modeling, claims analytics and fraud analytics.?? To determine how effectively insurers are taking advantage of risk analytics designed to meet the challenges facing their industry, we recently completed a global risk analytics study capturing and synthesizing insights from both P&C and life insurers.
We found that insurers surveyed are strongly committed to improving their capabilities in risk analytics. They are investing in analytics to improve their risk management capabilities, and they are already seeing results.? For example, 58 percent of P&C insurers, and 65 percent of life insurers, surveyed said that the use of risk analytics has significantly improved the quality of decision-making and has also enabled proactive risk monitoring.?
In general, insurers are under pressure from their investors and they are trying to find ways to conduct their businesses more efficiently.? Ongoing high costs are pushing insurance carriers to make better use of capital, but, to do that, they typically want more confidence about their exposure to risk.? Effective risk management can help a carrier free up capital, as well.?
Compliance is another major factor fueling the interest in risk analytics.? Insurers face multiple regulatory initiatives, including the Solvency II directives aimed primarily at European insurers. We also anticipate that Solvency II?s main elements, including capital calculation models, governance, Own Risk and Solvency Assessment (ORSA) internal controls and new norms for supervisory reporting and public disclosure, will be adopted by a variety of regulators around the globe.?
Our research indicates that insurers surveyed recognize the importance of risk analytics for a range of business processes including investment selection, risk selection and pricing, fraud management and loss reserving.? Risk analytics, in particular, can support more precise calculations of risk exposure to support growth.?
Insurers can benefit from a company-wide integration of risk management so that information used to assess risk in one core insurance process is available to assess other business opportunities from a risk/reward perspective.?? Firms should also think about integrating risk considerations more widely into decisions regarding operations, capital management and management processes.? Enabling a risk-adjusted operating model can help companies align their risk management programs with business and regulatory concerns.???
This approach can deliver numerous benefits to insurers seeking to generate growth while dealing with regulatory pressure, including:
- Better value generation through a broader application of risk management capabilities to support decision making and the pursuit of business opportunities.
- Improved decision-making through alignment of overall risk appetite and business strategy, helping increase the efficiency of capital utilization.
- Improved business results through integration of risk and core insurance processes and the alignment of processes and systems.?
- Enhanced operational efficiency through an integrated IT landscape, with a comprehensive and common IT architecture for multiple functions.?
Greater economic volatility in the markets, accompanied by increased uncertainty, has generated pressure to improve risk management capabilities in the insurance industry.?? In response, insurers are typically investing in more sophisticated risk analytics tools to improve the measurement of rare risk events that can severely affect their portfolios.?
Our research indicates that insurers are committed to making the investments necessary to improving their risk analytics capabilities.? Over time, an integrated approach to modeling and risk management can provide firms with better abilities to identify and predict risk.? As real-time analytics are incorporated into insurers? business and management processes, insurers may be better able to manage their exposures and also in a better position to explore opportunities for long-term, profitable growth.?
Forbes Topic: Leadership