The insurance business is inherently risky for the insurance company and agent. As an insurance agency, your company must provide service to your customers in the form of financial security and peace of mind. However, you also need to balance this service with smart risk-taking so you do not end up spending more money than the amount that comes in from clients. This is where the fine art of risk management comes into play.
Risk management is the science of keeping your clients and your company safe from financial ruin. The customer needs coverage in the form of insurance and your business needs to stay afloat by not spending too much money. Whether you work in home insurance, auto insurance, business insurance or any other kind of coverage, risk management is essential if you want your business to thrive for years.
Some areas of Risk Management include:
- Insurance Risk – This form of risk involves the services you offer as an insurer. You need to sell coverage that is useful to the client but also not so expensive for your organization if you need to pay a claim. The risk here can be handled in many different ways. Some companies opt to charge higher rates for higher risk clients and situations, while others offer lower rates in hopes of gaining more clients and, therefore, more income. As an insurer, you need to balance the cost of policies with the chances that the policy will lead to claims. This issue is further complicated by events such as natural disasters, where even the lowest risk clients will need to file claims for their damaged goods.
- Strategic Risk – This area of risk is more focused on handling the competition. How do you make sure that your company stays competitive with other insurance agencies? How to do make sure you retain your current client base and grow it as well? Offering better rates may bring in less money per client, but it is an effective way to pull customers away from a competitor. Unique services and personal attention to your clients is another great way to mitigate the risk of competitor companies taking your clients, and can even lead to some of their clients switching to your company. Most importantly, a willingness to try something new is essential, as the world continually changes, as does the insurance industry. The biggest risk is to keep things the same and simply say “We have always done it this way”.
- Investment Risk – Investment is one way most insurance companies obtain capital to run their companies. Shareholders and investors provide funding that is used for paying out claims, marketing the company, and generally keeping the business going. The company can also invest its own dollars in many different ventures, creating more wealth for the organization in the long run. Like all investments, there is the risk of loss, especially in a downturned or fluctuating economy. Carefully planning out where the money will be invested, and for how long, will help mitigate the risk greatly.
- Operational Risk – There are even risks in the realm of operating the business. Like any company in the modern day, hackers and viruses can cause all kinds of trouble, from destroying computer files to exposing sensitive data to cybercriminals. In addition to these worries, the loss of private data can result in legal issues for a company, so it is very important to have high-level security installed on all company computers, as well as provide training for all employees on how to handle potential threats. Various other operational risks also exist, such as having an office in a flood zone or having a company vehicle get into an accident. Whatever can be done to control these risks should be done and regularly checked for efficiency.
There are many good reasons to consider creating a thorough insurance company risk management plan. The safer you are from major financial risks, the less likely you are to lose great amounts of capital. At the same time, some level of risk must be taken in order to see financial gain. Shareholders and investors also want to see regular growth and upward mobility when investing, so a proper amount of risk will entice more investors, bringing in extra operating capital.
Insurance company risk management is not easy and an ever-changing game. Careful study of the risks and willingness to change company policies are very important and can be the keys to long-term success in a business full of risk.