One of the great strengths of the insurance industry is that it is always evolving. One area that deserves an update on progress and new trends is risk management. Risk is the very core of insurance. Carrying the financial risk and taking a view and judgment on likely claims ratios to premium income is the very stuff of insurance expertise. Get it right and you have a profitable, growing business. Get it wrong and you can end up with an uncompetitive product because of an urgent need to hike up premiums.
Before considering the new services available in risk management it is important to consider what is meant by risk management. Risk occurs in three main areas:
Within the product risk are key major considerations, such as the actuarial pricing of the product, design of the product and underwriting. Within the actuarial and underwriting scenario is the crucial expert view and forecasting of likely claims, their incidence and likely severity. Too many claims and in too short a period can dramatically upset the delicate profit margin between premiums received and claims paid out.
Investment risk is always there because the premiums have to be "invested" to provide funds sufficient to pay out the expected claims and while they need to be locked into safe investments, the really successful insurance companies are the ones whose investments increase in value.
Financial risk includes the capital required for the business and working capital to pay for running costs, including administration, back office and the obligatory compliance and legal services, so that policy wordings and associated documentation are effective and in accordance with best practice and regulations.
Then there are the research capabilities. In assessing risk, an insurance company actuary will not only consider all available statistics for the historical incidence of a particular risk but also demographic and geographic differences. Whether we like it or not, some indicators will show regional variations, such as the evidence that comes to light, from time to time, that people do seem to be healthier in some regions of the country. It might just be the weather but such differences cannot be ignored.
Within these areas an insurance product may have to take into account not only domestic market differences but also it may have to be designed for further afield, Europe, maybe, or even globally – so the need for reliable research is even more important.
These then are the basics of risk, but these traditional areas are changing shape because of new and developing outsourcing services. It is almost prohibitively expensive to set up a new insurance company in the UK. But with the growing needs of the public for a range of protection products, more and more organisations are looking towards "own branding". This is where outsourcing risk management companies like Criterion come in.
What we can offer our clients is an opportunity to share in the risk and, in so doing hold out the prospect of greater profits.
An important part of the new style outsourcing services is to "carry" or "hold" at least part of the financial risk on behalf of our partner clients and also to advise on the risk. An important prelude to this risk carrying and management is the initial consideration and proposals for a product that will be acceptable to a reinsurer. Their acceptance of a product's risk is in some way an endorsement of our design, pricing and risk management abilities and expertise.
We, as a company, are prepared to take on some or all of the risk together with our client "partner" organisations. We will assess the underwriting requirements and advise on any reinsurance needs. We arrange these if required and research the market for the most appropriate reinsurer for expertise and cost.
Our experience of the market and ability to provide the necessary technical ability and infrastructure enables our clients to design and operate their own branded high quality financial services products, including general insurance, life assurance, pensions and investment bonds.
So, where is the biggest demand for the new versions of own branded protection products? Increasingly we are experiencing a determined push by advisers, IFAs and brokers to have their own products. Health Insurance certainly leads the charge for popularity and activity at the moment. These include Income protection, healthcare, PMI and accident and sickness.
Also a major market is Credit Life or Creditor cover. This is life assurance linked to credit repayments by individuals. It can include a variety of loan or borrowing installments and repayments as well as the traditional hire purchase. Increasingly mortgage protection as stand-alone protection product is being sought. This is emerging against the background of major question marks about the validity and effectiveness of certain types of mortgage linked endowment contracts. Of course, with this sort of protection product, redundancy can also be covered.
Areas for cost efficiency
Looking ahead, there are major opportunities where risk management can provide an effective and more cost efficient service. One area that we are seriously exploring is a mortgage protection product through the net. The amazing growth of internet banking will require attendant protection products, which take account of the cheaper distribution costs the net represents, contributing to highly competitive premiums.
Explaining risk management in detail takes time because it is very detailed and requires technical abilities that are not always readily available. Unfortunately, there are some in the industry that consider that the two words "risk management" immediately indicates short-term activities. Decidedly not. Our ethos is for long-term relationships with our client organisations, together with a determination to build a position in the market place by the continuous upgrading of products for our clients and their customers.
This does not mean to say that new products are just designed to be piled high and sold cheap. If a product is designed well, priced well, explained well and marketed to properly targeted individuals and groups, the true worth of the protection will encourage higher than basic premiums.
What outsourcing can offer is an opportunity for an organisation to participate in successful risk management. Interestingly such an opportunity provides a classic change in attitudes when assessing the quality of a product and the risk. Being a stakeholder in the risk certainly heightens the desire to make sure that the product will not give rise to bad claims experiences because that way profits disappear.
One way of describing what risk managers can provide is "like a builder taking an architect's plans for a house, advising on the most cost effective way of building it, and then making sure that the building is maintained and kept in good order".
We provide all the necessary component parts to give client organisations a product over which they can retain control of marketing, distribution and administration. We even advise on levels of commissions to make a product competitive. Most important of all, however, is that our clients retain control of the access to their customers.
What must be stressed is that the emphasis must be on quality business and longevity. That way you build a profitable business. We consider that having such a standard is the best way to provide the same quality service to our clients. If any organisation considers that outsourcing is a quick way to make a short dash for profits they should not be in outsourcing and certainly not in the insurance industry which, let's face it, is all about planning for the long term. Especially risk management.