RISK MANAGEMENT A COMPETITIVE ADVANTAGE FOR INSURANCE COMPANIES IN THE COMESA REGION Risk Management has always been considered a process that is applied every day by everyone, be it a natural person or a legal person, sometimes even without realizing it. The complexity of the process differs greatly; taking into consideration the internal and external environment of the respective person. Almost any human endeavor carries some risks, but some are more riskier than others. The importance of risk management has been stressed by many experts and advisors such that each industry has its definition of a risk and how to manage them. The many inconsistent and ambiguous definitions attached to the word risk have led to widespread confusion and also mean that different approaches to risk management are taken in different fields.

As the word risk carries so many different meanings, there are many formal methods used to assess or to measure them. Quantitative definitions are well-grounded in statistics theory and lead naturally to statistical estimates, but some are more subjective. In the same vein, insurers and other risk carriers have come up with their definition of the word risk and what it means to them. They have also come up with requirements for a risk to be insurable. The implication of this is that not all risks can be insured. For a risk to be insurable, several things need to be true:-  A large number of homogenous exposures, spread over a large geographical area to prevent concentration.  The insurer must be able to charge a premium high enough to cover not only claims expenses, but also to cover the insurer’s expenses.  The premium must be reasonable to potential loss  The loss must be fortuitous. An insured cannot cause the loss to happen; it must be due to chance.  The nature of the loss must be definite in time and financially measurable  The loss must be random in nature. These requirements form the first step to risk management by insurers. Insurers are in the business of taking risks and in the process of providing insurance and other financial services; they assume various kinds of actuarial and financial risks.

Those who come to insurance seek the service of insurers because of their ability to provide risk pooling through the major product lines of life, property, casualty and health insurances. Ironically, the insurers, who undertake other peoples’ risks and at the same time advice their customers on adopting adequate risk management measures are in a dilemma as to how to manage the risks themselves. Some have neglected to apply the principles of risk management, with very bad consequences to their underwriting results. Insurance companies today are faced with a lot of challenges. In the last decade or so, the insurance industry have suffered from mispricing of insurance policies due to rate cuttings emanating from unbridled competition, an increase in occurrence of natural catastrophes, lack of professionalism, changes in the legal interpretation of liabilities and the limits of coverage etc. The churning of policies by unscrupulous sales agents, fraudulent claims, insolvencies of reinsurers backing the policies issued non compliance with the insurance regulations and malfeasance on the part of Officers and Directors have affected some, if not all the companies at one time or another. To mitigate all these problems and stay afloat in this competitive industry, it is imperative that the companies embrace the concept of risk management as a value adding factor and completion in this industry should be based on this single factor. The rationale for this is that insurance business is based on the concept of taking on risks of others and the management of the risks forms a very important part of the insurance operations. Managers and Investors in the Industry are interested both in expected profitability and the increase in their earnings or market values. Without these, they would rather divest from insurance and find other investment avenues for their capital. It has been argued that risks facing Insurance companies can be segmented into three separable types from a management perspective. These are:  Risks can be eliminated or avoided by standard business practices  Risks that can be transferred to other participants  Risks that can be managed at firms’ level. According to Wikipedia risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss, which is an undesirable outcome. The notion implies that a choice having an influence over the outcome exists. Risks threaten our prime objective in life, which is survival. This threat is so real particularly in today’s world; where occurrences that were initially thought of as remote are now almost daily occurrences. Experts from various fields and professions have concurred that this threat brought about by the persistent existence of risk can be dealt with though not fully eliminated through the process of risk Management. RISK MANAGEMENT Risk management can be defined as the identification, analysis and economic control of those risks that threaten our assets or the earning capacities of our assets/enterprises.

It is the management process aimed at eliminating or minimizing the adverse effects of accidental losses. It is the identification, analysis and economic control of those risks that threaten the assets or earning capacity of an enterprise. The concept has been embraced for a variety of reasons namely:-  Moral (Humane) Reasons  Financial ( Economic Cost) Reasons  Legal Reasons The human consequences of occurrences of risks of fires, accidents and incidences are widespread and affect different people in different ways. The most obvious results of fires for example are that persons directly involved are likely to suffer burns, loss of property and amenities. The effects upon families and dependants can be devastating and include emotional stress of seeing a family member suffer, financial hardships due to loss of earnings etc. Financially, it is known that fires and accidents cost money. The financial costs to an organization following a fire are substantial. A serious fire in a business premise can begin a spiral of events that may result in total business failure. Legally, there is a civil law duty to take care. Failure to take care can result in a claim for compensation by the individual who has suffered a loss. Questions such as “Why did it occur” or “How come it was not identified in due time” indicates that there the risk management policy is lacking or is implemented for the sake of having one. In the case of an insurance company, such questions imply that a loss has occurred and the services of a loss adjuster or investigator are required. Eventually money will be paid out. The second stage of Risk Management by insurers is at the underwriting stage. The Underwriting process can be one hot spot for an insurance company. Usually, the Marketing (selling) department is more interested in acquiring as many clients as possible, by taking as many exposures as possible. This can lead to severe exposure in terms of concentration of risk portfolio or undervalued (under priced) exposures. The underwriting process will try to identify and weed out risks that are not desirable for its books. The identification of the risks at the underwriting stage is the most important part in the risk management process. First of all the underwriter needs to have information about the object or risk to be insured.

This information is gathered and availed through the use of a standardized questionnaire, known as the proposal form, which is designed to raise questions relevant to the risk. It is important that all the answers to the questions are correct, since if vital facts are knowingly withheld, then insurers can subsequently renounce liability in case of a claim. This follows the tenet that insurance contracts are contracts of good faith, and relies fully on the principle of full disclosure. The proposal form goes into the root of the contract and once dully filled should be attached to and form part of the policy documentation. It should be read together with the schedules, specifications, endorsements, clauses and warranties as one contract. Sadly, despite its importance in the whole process, the proposal form has been largely ignored by both the Underwriters and the insured’s. This is one single factor that has brought risk management practice to its knees. Exquisite risk identification does not however guarantee a good risk management. The lack of internal procedures, backed by an inefficient internal control or lack of information system inside a company can have a negative effect on the whole process. Once the risk has been identified, the next stage is to have it assessed. Risk assessment is one of the fundamental factors in risk management. It is the process of identifying the hazards and evaluating the level of risks (including to whom and how might be affected) by the occurrence of the hazards, taking into account the existing risk control measures. Because of its important role in risk management, risk assessment must be conducted systematically. A systematic approach will ensure that nothing which could present a risk is inadvertently omitted. The objective if the risk assessment is to determine the likely hood of occurrence and the severity should there be an occurrence i.e. frequency and severity. The most important tool in risk assessment is the risk surveys. For credibility, the surveys should be conducted by qualified and credible surveyors. Insurance surveyors give advice about the risk concerned with any particular insurance. In their work, they:  Carry out surveys of items to be insured, e.g. buildings, machinery or stocks or any other insurable interest;  Advise people looking for insurance on what they can do to reduce the risks they want to insure against;  Produce written reports on surveys carried out;  Advise underwriters whether or not to accept a risk, and suggest the terms and conditions of the policy if they do accept it;  Make recommendations, for example, that a property needs a sprinkler system or improvements to its security. Surveyor gathers critical material facts that relate to the risk as he is the representative or “eyes” of the underwriter if the two are different. Information must be material or in other words relevant, to the type of insurance requested for, if it is at proposal stage, or as insured, if cover is already in force. It is important at the time of conducting the survey to obtain the correct information about a risk, and for this reason appointments have to be or must be made with the right people in the organization. Where possible site plans of the risks to be surveyed must be obtained in advance for study before the visit to the proposer’s or insured’s premises Once the assessment procedures are complete, the next stage is to evaluate the risk. Risk evaluation involves taking into account any control measures that are already in place. Some risks may have been adequately controlled leaving only low residual risk, The evaluation process takes into consideration factors of frequency and severity of the risk as well. Based on these, the risk manager considers different solutions/proposals for protecting the company against the specific exposure. The evaluation process must include both the controllable risks and the non-controllable risks for Insurers. In the case of controllable risk, the underwriter must decide if the company will take over entirely those risks or the procedures necessary to reduce them. In the case of non-controllable risks, they will decide whether the company will accept the risks or will eliminate/reduce the activities that are exposed to those risks. The evaluation implies also “what- if” scenarios, including where the forces of nature (natural Perils) are concerned, in order to get a better response to the actual occurrence. The methods used for risk evaluation are qualitative analysis, quantitative analysis band semi-quantitative analysis.

Once the risks have been evaluated, an action plan can be formulated depending on the resultant risk grading i.e. high risk, medium risk, low risk or insignificant risk etc. RISK CONTROL The risks contained in the insurance product sales are all borne by the Insurer himself. In many instances, the institution will eliminate or mitigate the risks associated with a transaction by applying proper business practices. In others, it will shift the risk to other parties through Reinsurance. Only the risks that that are not eliminated or transferred to other participants are left to be managed by the firm for its own account. The reasoning behind this is that the company should not engage in a business that unnecessarily imposes risks upon it nor should it absorb risks that can be efficiently transferred to other participants. Rather it should only manage risks that it can efficiently manage at its level taking into account the resources available. Having analyzed the risk, the next stage is to consider the effectiveness of the controls and if need be additional control measures that will be required to reduce the risk, as low as is reasonably practicable. A wide range of risk control measures are available and they include:-  Avoiding the risk;  Combating the risk at source, and thereby preventing the risk from occurring;  Adopting technical progress to limit occurrence e.g. fire fighters, sprinkler systems etc  Replacing dangerous by non-dangerous or less dangerous materials;  Reducing the loss in case of occurrence. RISK AVOIDANCE The practice of risk avoidance involves actions that reduce the chances of incurring losses from insurance by eliminating risks that are unnecessary to the company’s business. The common risk avoidance practices are of two types of actions:-  The standardization of the underwriting process and eliminating risks that do not fit in.  Insurance policies and contracts and procedures that prevent inefficient or incorrect financial decisions. The most commonly used practices are to have warranties, exclusions, endorsement clauses and policy conditions. In any case, the goal is to rid the firm of the risks that are not essential or for which it might not have the capacity to write, or to absorb.

RISK FINANCING These are techniques which provide finance to make good after an occurrence. They include risk retention and risk transfer, and a combination of the two. RISK TRANSFER There are also some risks that can be eliminated or at least substantially reduced through the techniques of Risk Transfer. Some can be transferred to Reinsurers or other Pools specifically created for the type. CONCLUSION/INSURERS’ ROLE: Insurers must play a key role of embedding the concept of risk management in the community of industrial managers. They should take more initiative for introducing the concept of risk management in the industry. With their active participation, the claims ratios will definitely improve; there will be a reduction in down time for the organizations, thus increasing productivity. These have beneficial effects to the Insured’s and the insurers in that the cost of risk transfer will be reduced. Risk Management is a continuous process that should be used in the strategy of the undertaking and which should allow an appropriate understanding of the nature and significance of the risks to which the insurer is exposed to. It must be done throughout the company and it must be backed up by constant communication between departments, management team and personnel. The author is the Training Manager, Zep-Re. Bibliography 1. Andrew Furness & Martin Muckett: Introduction to Fire Safety Management 2. Principles & Practices of Insurance