The application of strategic management in facilitating risk-based Insurance decisions

Prior to the recent financial crisis a number of insurance companies had enterprise risk management functions that rating agencies considered excellent or strong, and yet some of those companies required a sovereign bailout during the crisis to remain a going concern. Numerous commentators said in the immediate aftermath of the crisis that it was unpredictable . Many enterprise risk functions do reasonably well identifying, modelling and mitigating more knowable risks such as some potential natural catastrophes, but they face a bigger challenge identifying, quantifying and mitigating more ambiguous threats that germinate as weak signals, such as financial crises. Based on our research and perspective many insurers did not have mechanisms in place to identify and track the weak signals of an impending financial crisis, and as a result they did not mitigate crisis risk prior to 2007. To prevent a recurrence of this experience, a more comprehensive risk management solution is required that specifically seeks to identify, track and mitigate potential inflection points. Inflection points often germinate as weak signals that go unnoticed because people either do not look for them, or because they discount or otherwise ignore them. This is unfortunate because many inflection points and resulting business failures are foreseeable, and therefore can be considered predictable surprises not black swans. As we define it, strategic risk management (SRM) is the process of identifying, assessing and economically managing potentially enterprise-threatening losses over time; in other words, it is a way to mitigate evolving risks before they spiral out of control. Below we identify and describe the functions comprising SRM, and we illustrate each by way of practical examples.

Keywords:

strategic management , risk , insurance ,