Insurers becoming risk-averse, warns study

Regulation is driving insurance sector workers to become more risk-averse to the possible detriment of profitability, according to the preliminary findings of a study partly funded by the Chartered Insurance Institute (CII).

The study, by the LSE and University of Plymouth into corporate risk culture based on a survey of over 2,000 CII members, found that risk management is mostly seen as a “hygiene activity” to deal with negative outcomes, or one that is forced upon the organisation by the regulators. The notion of risk management as a potential creator of profitable opportunity was seen as secondary.

But the paper warned that insufficient risk-taking could have “the same bankrupting effects” as taking too much risk. “The difference in the case of insufficient risk-taking is that the end may come more slowly, as the organisation struggles to generate sufficient profits to achieve its business objectives,” the academics wrote.

“Our findings suggest that the dominant risk culture is one of precaution, with a focus on documentation and compliance, rather than managing risk for business benefit.

“Such a culture might well seem desirable in the light of the financial crisis and more recent scandals. However we are concerned that such cultural attributes can have potentially dysfunctional effects on risk-taking.”

Laurence Baxter, head of policy and public affairs at the CII, said the paper showed a need to drive professionalism in the sector, to give insurance practitioners context and the tools to judge an appropriate risk management strategy.

The final report, which will also look at a survey of CIMA members and examples of risk management in other industries, will be published in September.