“INSURANCE IS A BUSINESS OF RISK, NOT A RISKY BUSINESS”

Submitted by

Aayushi Jha (2202)

B.B.A., LL.B.( Hons.)

Submitted to

Mrs. Nandita S. Jha

Assistant Professor of Law

This final draft has been submitted in the partial fulfillment of the Law of Insurance
course of the 8th Semester of B.B.A., LL.B. (Hons.).

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA.

March, 2023.

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 TABLE OF CONTENTS
DECLARATION BY THE CANDIDATE…………………………………………………………………………………………………………3

ACKNOWLEDGMENT………………………………………………………………………………………………………………………………4

INTRODUCTION………………………………………………………………………………………………………………………………………5

 AIMS AND OBJECTIVE

 RESEARCH QUESTIONS
 HYPOTHESIS
 RESEARCH METHODOLOGY
 LITERATURE REVIEW

CONCEPT OF INSURANCE RISK………………………………………………………………………………………………………………9

COMMON RISKS INVOLVED…………………………………………………………………………………………………………………..12

STEPS TO MITIGATE………………………………………………………………………………………………………………………………14

 IRDA REGULATIONS
 THREE LEVEL DEFENCE MODEL

RISK CONTROL IN THE INSURANCE INDUSTRY………………………………………………………………………………………16

 LIFE INSURANCE
 GENERAL INSURANCE

EMERGING TRENDS………………………………………………………………………………………………………………………………18

CONCLUSION………………………………………………………………………………………………………………………………………..19

BIBLIOGRAPHY………………………………………………………………………………………………………………………………………21

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 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.B.A., LL.B. (Hons.) project report entitled
“INSURANCE IS A BUSINESS OF RISKS, NOT A RISKY BUSINESS” submitted at Chanakya
National Law University is an authentic record of my work carried out under the supervision of
Mrs. Nandita S. Jha. I have not submitted this work elsewhere for any other degree or diploma. I
am fully responsible for the contents of my project report.

Aayushi Jha (2202)

B.B.A., LL.B. (Hons.) 4th year

SEMESTER -8th

CNLU, Patna

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 ACKNOWLEDGMENT
Writing a project is one of the most significant academic challenges I have ever faced though this
project has been presented by me but there are many people who remained in veil who gave their
all support and helped me to complete this project.

First of all I am very grateful to my subject teacher Mrs. Nandita S. Jha, without the kind support
and help of whom and help the completion of the project could not have been possible for me. He
gave me his valuable time from his busy schedule to help me complete this project and suggested
me the methods to collect relevant data and study the topic allotted to me.

I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in the acknowledgement of this project. I would also take this opportunity
to convey my vote of thanks to my seniors who guided me throughout this project.

This project would not have seen the light of the day without the endless support of my parents and
family. I am very much thankful to them for always standing beside me and helping me a lot in
accessing all sorts of resources.

I thank all of them!

Aayushi Jha (2202)

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 INTRODUCTION

Insurance companies are in the business of taking risks of various kinds. All over the world, the
insurance companies write the policies that deal with specific risks, and in many cases even
underwrite exotic risks. As a direct corollary, therefore insurance companies should be good at
managing their own risks. However the reality is little far from that. While these companies are
good at assessing insurance risks for its policy holders, but not very good at setting up structures
internally for managing their own operating and business risks. In short, Insurance = Collective
bearing of Risk.1 In other words, Insurance is nothing but a system of spreading the risk of one onto
the shoulders of many. While it becomes somewhat impossible for a man to bear by himself all
kinds of losses right from his own health, property or interest arising out of an unforeseen
contingency, insurance is a method or process which distributes the burden of the loss on a number
of persons within the group formed for this particular purpose. Risk and uncertainty are inseparable
twins. While the risk as such cannot be averted, it is to be recognized that it has multi-faceted
outcomes. The insurance companies cover the uncertainty of a financial loss. The insurance
companies’ do not have any command on uncertainties. This makes it essential that these
companies favor of a practice that becomes instrumental in spreading the loss.

Insurance is often viewed as a risky business, but in reality, it is a business of risk. Insurance
companies exist to manage risk, not to take on unnecessary risks. Insurance companies make
money by charging premiums that are based on the risk of loss, and by investing the premiums they
collect. The key to a successful insurance business is the ability to accurately assess and manage
risk.

This paper explores the concept of risk in the insurance industry, examines the role of insurance
companies in managing risk, the various types of risk that insurance companies face, and the
methods that insurance companies use to manage risk. It also discusses the impact of technological
advancements on the insurance industry and the challenges and opportunities they present.

AIMS AND OBJECTIVE

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The primary aim of this research work is to objectively study and anlayze the concept of risks in the
insurance industry, vulnerabilities, control and mitigation in accordance with the relevant IRDA
regulations.

RESEARCH QUESTIONS

1. What is the concept of risk in relation to insurance industry?

2. What are the different kinds of risks that insurance companies partake in?
3. What is the effectiveness of insurance while managing risks?

HYPOTHESIS

Insurance is a business of risk and not a risky business because it operates on the model of
spreading the risk as a group of people as opposed to an individual’s capability of handling the
same risk.

RESEARCH METHODOLOGY

The researcher has conducted doctrinal research.

REVIEW OF LITERATURE

The researcher has reviewed the following research articles to enrich the research.

 Contingency planning also referred to as business continuity planning is theory that is well
associated with risk management, the basis of this theory is that since all business risk
cannot be fully eliminated in practice. Despite firm’s efforts to mitigate, avoid and prevent
risk incidents will still definitely occur.2 With reference to this study contingency theory can
be used to mean controls, plans, process and the totality of activities, it’s the act of
preparing for major catastrophe and occurrences, articulating malleable strategies and
rationalizing appropriate assets that will come into play in the event.

 Risk management theory applies in the assessment, identification and prioritizing of risks
followed by economical and coordinated of resources to monitor; control and minimize the

2
Hameed, 2004, Systematic risk factors in the insurance industry and methodology for risk assessment.

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 impact of unsuccessful measures. Effective business risk management has beneficial
implications to organizations; these benefits include improved innovation, better
management of contingent, superior financial performance, and better value for money,
waste reduction, minimize fraud, greater competitive advantage among other benefits
(Wenk, 2005).3 This helps the firm to balance the most significant business pressure,
responsibility to succeed and risks associated and generated by the firm itself in a
commercial achievable way. This action will enable risk managers to be aware of the risks
they face and therefore monitor and if need be they was able to change strategy.

 Holton describes financial risk as the unexpected volatility of returns which is measured in
terms of market risks, credit risks and liquidity risk.4 This same view is in agreement with
Kithinji who defined financial risk management as those procedures and activities that
managers employ in order to protect the organization from market risks, credit risks and
liquidity risk which are the major categories that financial risk management practices into. 5
In provision of insurance and other financial services organizations assume various kind of
financial and actuarial risk, insurers product risk contained embedded products that are
offered to customers to protect them from the actuarial risk that are not borne by the insurer
directly.

 Revell (2009) define operation risk as the risk of loss resulting from failed people, internal
process and system through which an organization operates.6 Mainelli (2002) also describe
operation risk as slippery and complex. Risk is incurred in an organization by its internal
(environmental risk, fraud and legal risk) and external (terrorism attacked, natural disasters)
activities. Unlike credit risk and market risk the definition of operation risk is still evolving.
According to Lopez (2002) internal process would closely tie the organization business lines
and specific products that are more specific than risks due to external occurrence.

3
Ibid.
4
Holton, G. (2004). Defining risk. Financial analysts journal vol. 60 issue number 6, 19-25.
5
Kithinji, A. (2010). Credit risk management and profitability of commercial banks in Kenya: Nairobi.
6
Revell Mugenda, O., & Mugenda, A. (2003). Research methods: quantitative and qualitative approaches. Nairobi:
ACTS press.

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  Risk monitoring helps the organization managers to discover the problems which might
have occurred in organisation system. Any organization that adopts appropriate risk
monitoring strategy this means that appropriate pricing in the line with estimated risk is
achieved which results to profit (Saunders & Allen, 2002).7

 Anthony and David (2007) define liquidity risk as the risk of funds crisis. 8 Because
insurance firms operates in market where clustered claims can appear any moment due to
catastrophes that are beyond human control or massive withdrawal and surrenders due to
changing interest rates their liabilities are referred to as liquid, organization assets however
are sometime liquid less more probably when they investments are in real estate.

7
Saunders, M., Lewis, P., & Thornhill, A. (2009). Research methods for business students 5th edition. Harlow: Pearson
education.
8
Anthony and David, Price Waterhouse Coopers . (2009). Operational risk management . Zurich : Credit Suisse group.

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CONCEPT OF INSURANCE RISK, FACTORS AND RISK MANAGEMENT

Insurance indemnifies assets and income; every asset has a value and generates income to its
owner. There is a normally expected life-time for the asset during which time it is expected to
perform. If the asset gets lost earlier, being destroyed or made non-functional through an accident
or other unfortunate event the owner is prejudiced, efforts have to be made to mitigate
consequences of such adverse circumstances which form part of risks.

Insurance is the science of spreading of the risk: It is the system of spreading the losses of an
individual over a group of Individuals. Insurance is a method of sharing of financial losses: A few
from a common fund formed out of contribution of the many who are equally exposed to the same
kind of loss What is uncertainty for an Individual becomes a certainty for a Group. Risk
Identification The insurance industry has had to struggle with drastic, sometimes sudden changes to
regulations, government policies, and risks associated with natural disasters and environmental
trends.9

Predictive models, which are often called generalized linear models (GLMs), have become the
standard for insurance companies around the world. GLMs are used to foresee the possible risks a
particular sector may face by accounting for the various problems that may arise in the particular
area of the insurance industry. Once equipped with this knowledge, insurance companies can price
policies in a way that will ensure their continued solvency and service to consumers, as well as their
own profits.

Risk is the possibility of losing economic security. Most economic risk derives from variation from
the expected outcome. Insurer uses rigorously technique to identify, monitor and manage the risks.
Some of the techniques are stochastic modelling, value at risk, tail risk, economic capital
calculations, stress tests and more and identify negative impact. Identification of risk is
determination of risk where does it lie. The risk may be relating to property, Life, Liability and
Nature. Fire, theft, damage, natural calamities are the various hazard.

Property Loss: The factors responsible for loss are identified and evaluated for the purpose. The
insured and uninsured perils are identified. Replacement possibilities are calculated on the basis of

9
Dr. A.A. Attarwala, C.S. Balasubramaniam, Abhinav Publications, Vol. 3, Issue 11(2011).

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valuation .The book value is the minimum loss value of the property because it denotes the
purchase price and depreciation of the property. But it is not economic value which is the real loss
of the property. Market value is very near to economic value. If the firm does not get value of the
property any benefits of use of value; it will be equal to market value. Replacement cost is
considered for insurance as it is the cost of replacement of damaged property but it exceeds the
market value as the new property value increases due to inflation, Fire insurance, marine insurance,
motor insurance, machine insurance, profit insurance etc. are the methodologies of loss deduction
due to risk. Large loss: The size of the loss must be meaningful from the perspective of the insured.

Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and
administering the policy, adjusting losses, and supplying the capital needed to reasonably assure
that the insurer will be able to pay claims Life Risk: Human life is exposed of several risks e.g., old,
age, death, health, accident and so on. Some responsibilities such as education and marriage of
children, starting of their career, business responsibilities, key men employees, etc. are also
attached with human life,

Life insurance policies, health insurance, key man insurance etc. are prevailing to minimise the loss
of human life. Liability: Liability mainly legal liabilities arise because of contractual relationship.
Third party insurance of motor insurance, product liability and professional liability and many new
liabilities are added in recent years. Other Risks: There are several other risks which influence the
cost and production. Profit insurance is taken for the purpose. Machine breakdown and crop
insurance etc. are the recent examples of other risks which are separately insured to reduce the loss
can used by such risks. Risks are measured using probability methods. Last experiences and
variance analysis with standard deviation are used for measuring risks. The probability is modified
with the present situation and future expectation. 10

Simply put, insurance is the business of buying and selling risk. In many situations, businesses and
individuals are risk-averse. This means that they would prefer to pay some amount of money to
reduce the amount of uncertainty in a situation.

10
Danish Ahmed, Emarald insight, (10th March 2023, 09:30
PM)https://www.emerald.com/insight/content/doi/10.1108/EJMBE-08-2021-0221/full/html.

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For example, consider a simple coin flip game. If the coin lands on heads, you receive $100,000. If
it lands on tails, you receive nothing. The expected value of your winnings is 50% * $100,000 +
50% * $0 = $50,000

Most people would prefer the guaranteed $50,000. What about $49,000?

If someone would prefer $49,000, they are risk averse. They are willing to pay a premium of
$1,000 to eliminate the uncertainty in this situation.

As another example, let’s consider one of the oldest examples of insurance in the real world:
property/home insurance. Modern property insurance goes back to shortly after the Great Fire of
London. There was a desire among individuals to reduce the financial risk of losing their homes to
fire. And companies (i.e. insurers) were founded to meet this need.

Let’s look at the economics behind this:

Let’s assume someone owns an apartment valued at $500,000 and that the insurer only offers one
type of insurance, total insurance. Essentially this insurance will pay for any damage done by fire
over the next 5 years.

The probability of loss over that time period is as follows:

 1% chance of total loss ($500,000 cost)

 2% chance of minor loss ($100,000 cost)
From the individual’s point of view, their expected loss is 1% * $500,000 + 2% * $100,000 =
$7,000. Since the individual is risk-averse they are willing to pay at least $7,000 for the insurance
policy, but let’s say the insurer charges around $10,000. This cost can be thought of as three parts:

1. The actual expected payout to the individual = $7,000

2. The risk premium (the cost to the insurer for having additional risk) = $500
3. Overhead and administrative costs of providing insurance = $2,500

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In this case, if the individual opts for the insurance coverage, they are willing to pay a $3,000 risk
premium over the anticipated $7,000 in damages to insure against the risk of a greater loss. There is
an important insight here: Insurers are better equipped to handle risk than individuals. As a result,
that $500 risk premium the insurer faces is a lot lower than the $3,000 risk premium the individual
is willing to pay.

In fact, there are a number of reasons insurance companies can better handle risk (e.g. “floating”
premiums until claims need to be paid), but the biggest reason comes down to simple probability.

Talking about the coin flip game from earlier, the game is now a 50/50 chance at $10,000 and you
get to play 10 times. The expected value is still $50,000. But now would you accept a guaranteed
$49,000 over the game? Maybe not. That’s because by playing the game many times, you reduce
the uncertainty. Since an insurance company can take on many customers, it can effectively reduce
the amount of uncertainty it faces.

COMMON RISKS FACED BY INSURANCE COMPANIES

1. Liquidity risk

Liquidity is the ease in which business assets can be converted into cash. This is an important
aspect of consideration for success in an insurance company. Liquidity risks may arise due to a
large number of clams in general insurance and a large surrender of policies in life insurance. This
may lead to a loss of the company property in instances when the company may not be able to raise
the required cash. 11

2. Actuarial Risks

Actual studies deal with the study of risks and quantifying the amount of compensation accorded to
each risk. Actuarial risks may be caused by different factors such as mortality rate variance, perils

11
Affluent Finacial Services LLc, (10th March 2023, 10:00 PM)https://www.affluentcpa.com/common-risks-faced-
insurance-companies/.

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and certain variance. Calculations of the given risks may be subjected to a variety of adjustments.
You may consider current statistical data, some past experience and future possibilities but in the
future, there will be a great variance in the speculated and the risks amount.

3. Reputation risks

Reputation risks are faced when an insurance name has lost value in the insurance market. This has
a great impact on the amount of revenue which will be raised by the insurance company. In the
short run, it may not be an easy task to quantify the exact value caused by the reputation risks but
adverse results may pop-up during auditing. In Extreme cases, reputation risks may lead to
bankruptcy.

4. Business risks

Business risks that are faced by the insurance company are just the normal risks faced by many
other businesses. Risks ranging from data breaches have resulted in a loss of the great amount of
relevant data in the insurance industry. Other related business insurance risks include human capital
loss, loss of damage and some of the relevant professional service mistakes that may be relevant.
There is a lot to do when faced with this risks. A lot of professionalism is required to handle these
risks, especially in the insurance industry.

5. Strategic risks

Strategic risks in the insurance sector require excellent strategic management skills to avert risks.
Strategic risks involve the process of identification, assessing and the management of the insurance
strategy.

6. Underwriting insurance Risks

Underwritings of risks resulting from the process of selection and approval of which risks need to
be insured. Insurance risks may also be caused by the use of an inflexible underwriting of risks

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process. The process of underwriting forms the basis of insurance and the failure to get it right at
this step may result in great loses in the future.

Additionally, there has been refreshed guidance and regulatory updates as a result of the
Coronavirus pandemic and the potential post-COVID litigation that is rocking the very perception
of the insurance industry in many lines, like business interruption and the travel industry. 12

Operationally, against this complex backdrop, insurers are challenged to continually juggle an ever-
growing number of risk-related balls, including:

 Ensuring compliance whilst managing large volumes of data stored across disparate legacy
and modern systems
 Making sure products, sales and claims managements systems and processes are all
designed with the customer’s best interests at the center of them
 Guaranteeing proactive identification and reduction of fraud across applicants,
policyholders, third parties, and employees
 Making every effort to protect the organization and its customers from cybercrime
 Minimizing the potential for operational risk such as human error, out-of-date or inadequate
procedures, sub-par systems or processes
 Managing remote workers to make sure they are compliant with policies and procedures
 Ensuring that third parties do not represent a risk to customers or to the business
 Maintaining solvency in financially turbulent conditions

STEPS USED TO MANAGE RISK BY INSURANCE COMPANIES

Managing risks in Insurance Industry is imperative for achieving success in competitive markets.
Risk management processes are cyclic process which starts from identification of a risk and it may
result in identification of another new risk. The company needs to have a process (or processes) in

12
Cameron Easey, Chron, (12th March, 2023, 10:00 AM) https://smallbusiness.chron.com/risks-insurance-business-
16876.html.

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place for risk management to be effective. 13 Here are the five steps the companies use for risk
management:

(1) Identify Risks – Identify risks that affect the company (positively or negatively) and
documenting their characteristics

(2) Assess & Analyse Risks - Assess the risk impact, Analyse the probability of risk occurrence and
prioritize the risks, numerically analyse the effect of identified risks on the companies objectives
i.e. usually on cost, schedule and scope targets.

(3) Plan Actions – Explore all the possible ways to reduce the impact of threats (or exploit
opportunities). Plan actions to eliminate the risks (or enhance the opportunities). Action plans
should be appropriate, cost effective and realistic.

(4) Monitor & Implement the Action – Track the risks throughout the project. If risks occur then
implement the risk strategy based on action plan

(5) Measure the effectiveness & Control the risk impact - Measure the effectiveness of the planned
action and controlling the risk impact by understanding risk triggers & timely implementation of
planned actions.

IRDA REGULATIONS

Based on the ERM Model and emerging from the Global financial crisis of 2008, Insurance
Regulatory & Development Authority (IRDA) issued a set of Guidelines of Corporate Governance
in 2010, which contained a reference to the setting up a mandatory Risk Management Committee
(RMC). The RMC has to lay down a risk management strategy across various lines of business and
the Operating Head must have direct access to the Board. However IRDA left it to the companies in
the Insurance sector to work out the details of how risk management functions were to be suitably
organized by the respective companies, given their size, nature and complexity of the business. But
that should in no way undermine the operative independence of the risk management head. Because
of this leeway, most of the Indian insurance companies have given the risk management
responsibilities to their actuaries, which is not a very strongly recommended path.

13
Brainkart, (10th March 2023, 08:00 PM) https://www.brainkart.com/article/Insurance-Business-Risks_34921/.

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Three lines of defense Model: The three-line defense model is one of the most popular governance
models. It lays down very specific responsibilities for each line of defense while ensuring
independence. The first line of defense is the primary responsibility for strategy, performance
management, and risk control which lies with the Board, the CEO and the senior management. The
second line of defense is oversight of risk framework by the risk committee, CRO, the risk
management functionaries with their counterparts in other areas. The third line of defense is the
stringent internal audit that ensures the independence and the effectiveness of the group’s risk
management systems.

RISK CONTROL IN THE INSURANCE INDUSTRY

The risks are controlled through insurance with the principle of pooling; cooperation and transfer
of risks, Insurance of risks are becoming a gradual and continuous process. The Indian experience
is very positive wherein insurance is expanding with more than 15 percent per annum. 14

 RISK MANAGEMENT IN LIFE INSURANCE

The life insurance industry has long been keen to make note of the changes that could affect its
exposure to risk and financial loss. Over the many decades of its existence, the insurance industry
has become quite proficient at predicting the future and adapting according to the dangers it
foresees. This is largely due to the advent of predictive models, a tool used throughout the industry
to calculate risk and price coverage accordingly.

Solvency Margin: The insurer makes assumptions into future for parameters such as mortality,
morbidity, expenses, interest etc. Sub regulation (b) of Regulation 5 of IRDA Regulations (Assets,
Liabilities and Solvency Margin of Insurers) 2000; specifies that the best estimate assumption shall
be adjusted by an appropriate Margin for Adverse Deviation (MAD) which is dependent upon the
degree confidence. The purpose of MAD is to build a buffer for miss-estimations of the best
estimate or adverse fluctuations. But it does not cover for volatility and catastrophe risks for which
separate excess assets known as Solvency Margin should be provided by the insurer.

14
Dr. A.A. Attarwala, C.S. Balasubramaniam, Abhinav Publications, Vol. 3, Issue 11(2011).

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Risk Based Capital: Risks based capital includes asset default risk, mortality morbidity risk,
volatility risk, catastrophe risk, margin risk and fund risk. Each company needs to develop
implement and maintain appropriate and effective procedures to manage its capital position, i.e.
ongoing minimum capital requirements, and future capital requirements. The capital management
planning identifies the quantity, quality and sources of additional capital required, availability of
any external sources, estimating the financial impact of raising additional capital, taking into
account the plans and requirements of various business units of the company, Risk Based Capital is
an amount of capital based on an assessment of risk that a company should hold to protect policy
holders against adverse developments.

Risk based capital involves identifying the key risks and quantifying them.

(i) Insurance Risk: It is underwriting, risk associated with the uncertainty of

business written in the future
(ii) (ii) Market Risk: It is the risk associated with movements in interest rates,
forcing exchange rates or asset prices lead to an adverse movement in asset
values
(iii) (iii) Credit Risk: If another party fails to perform them in time i.e. If the party
fails to pay the credit. So, allowance should be made for the financial effect of
non-payment of reinsurance and of the nonpayment of premium debtors.
(iv) (iv) Liquidity Risk: It is the risk that a firm has insufficient financial resources to
meet its obligation as they fall due or can only secure the resources at excessive
cost.
(v) (v) Operational Risk: It in the risk of direct or indirect loss resulting from
inadequate or failed internal processes, people and system or from External
events. It is common knowledge that life insurance companies are subject to 3
major risks while entering into contracts with their policy holders: first, the
mortality rate of the insured lives may turn out to be higher than anticipated
second, the management expenses of the companies may be higher than those
forecast and third, circumstances may lead to a portfolio yield which is lower
than that assured while calculating the premiums.

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  RISK MANAGEMENT IN GENERAL INSURANCE

Solvency Margin Formula: IRDA's relevant regulations prescribe required solvency margin (RSM)
at 20% of the net premiums or 30% of net increased claims whichever in higher.15

Risk Based Capital: Risk Based Capital (RBC) formula comprises asset risk, credit risk,
underwriting loss, underwriting premium risk and off balance sheet risk.

Reserving: The importance of proper reserving cannot be over-emphasised. The failure to provide
adequately for future claims is attributed to 'under reserving' or 'under provisioning'. Reserves can
be classified as unearned premium reserves (UPR), Unexpired Risk Reserve (URR) outstanding
Claims Reserve (OCR), Chain Ladder Method (CI), Average Cost per Claim Method (ACPC) and
Incurred but not reported Reserve (IBNR).

Alternate Risk Managements: These are several alternate risk management strategies such as risk
transfer (reinsurance), risk hedging through interest ratio etc. longevity bonds and managing
financial market risks.

EMERGING TRENDS AND STRATEGIES

Risk is inherent in any walk of life in general and in financial sectors in particular. Due to
regulated environment, banks could not afford to take risks. Insurance companies are exposed to
severe competition and hence are compelled to encounter various types of financial and non-
financial risks. Risks and uncertainties form an integral part of insurance companies which by
nature entails taking risks which are explained above. It is vital to deepen the collaborative
dialogue between industry and regulators, to deepen shared understanding of the challenges and
opportunities for strengthening risk management capability. There is a need to make sure that
bureaucracy and costs are minimised, &business benefits maximised. The main goal is improved
risk management, not regulatory compliance. IRDA has issued a rich variety of guidelines to be
pursued by the insurance companies rigorously within the risk management framework.

15
Supra.

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 The insurance companies need to upgrade their credit assessment and risk management skills and
retrain staff, develop a cadre of specialists and introduce technology driven management
information systems.16

The insurance industry is constantly evolving, and emerging trends are shaping the future of the
industry. One such trend is the rise of insurtech, which uses technology to streamline insurance
processes, reduce costs, and enhance customer experience. Another trend is the increasing focus on
environmental, social, and governance (ESG) factors, which are becoming critical to the insurance
industry's sustainability and reputation. Finally, the COVID-19 pandemic has highlighted the
importance of risk management and the need for insurance coverage against pandemics and other
systemic risks.

CONCLUSION

Insurance is an important aspect of modern society, providing individuals and businesses with
financial protection against the risks of unforeseen events. The concept of insurance dates back to
ancient times, where traders and merchants would pool their resources to mitigate the risks of lost
goods or ships. Today, insurance is a multi-billion-dollar industry, with thousands of companies
providing coverage for everything from property and life to liability and cyber risks. While
insurance companies are often perceived as risky, in reality, their business model is built on
managing risk and mitigating potential losses.

The insurance industry is a complex network of companies, agents, and underwriters that provide
financial protection against risk. There are many types of insurance, including life, health, property,
casualty, and liability insurance, each designed to address specific risks. Insurance companies
collect premiums from policyholders and use the funds to pay claims in the event of a covered loss.
In exchange for this service, insurance companies charge a fee, known as a premium, which is
based on the probability and severity of the risk.

16
George Njoroge Ngotho, Effects of Business Risks on Performance of Insurance, (5th March 2023, 10:00 PM)
https://core.ac.uk/download/pdf/224836734.pdf.

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Insurance companies play a critical role in managing risk and providing financial protection to
individuals and businesses. They use actuarial science, statistical models, and historical data to
assess risk and determine appropriate premiums. Insurance companies also invest premiums in
various financial instruments to generate income and ensure solvency. In addition, insurance
companies provide policyholders with risk management advice and services, such as loss
prevention and mitigation strategies.

Like any business, the insurance industry is not without risks. Insurance companies face various
risks, including underwriting, investment, and operational risks. Underwriting risk refers to the
possibility that an insurance company may incur losses due to inaccurate risk assessment or pricing.
Investment risk arises from the company's investment activities, which may result in losses due to
market fluctuations or default. Operational risk refers to the risk of losses due to inadequate internal
controls, fraud, or other operational failures.

To mitigate these risks, insurance companies employ various risk management strategies.
Underwriting risk can be managed through accurate risk assessment, effective pricing, and
diversification of risk. Investment risk can be managed through prudent investment practices and
diversification of investments. Operational risk can be managed through effective internal controls,
fraud prevention measures, and regular audits.

In conclusion, the insurance industry is a business of risk, where companies provide financial
protection against the uncertainty of future events. While insurance companies face various risks,
they employ risk management strategies to mitigate them and ensure solvency, which enables them
to take on the business of risk in a calculated way.

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 BIBLIOGRAPHY

Research Paper/ Books:

 Hameed, 2004, Systematic risk factors in the insurance industry and methodology for risk
assessment.

 Holton, G. (2004). Defining risk. Financial analysts journal vol. 60 issue number 6, 19-25.
 Kithinji, A. (2010). Credit risk management and profitability of commercial banks in
Kenya: Nairobi.
 Revell Mugenda, O., & Mugenda, A. (2003). Research methods: quantitative and qualitative
approaches. Nairobi: ACTS press.

 Saunders, M., Lewis, P., & Thornhill, A. (2009). Research methods for business students
5th edition. Harlow: Pearson education.
 Anthony and David, Price Waterhouse Coopers . (2009). Operational risk management .
Zurich : Credit Suisse group.

WEBSITES/ REPORTS/ JOURNALS:

 Danish Ahmed, Emarald insight, (10th March 2023, 09:30

PM)https://www.emerald.com/insight/content/doi/10.1108/EJMBE-08-2021-0221/full/html.
 Affluent Finacial Services LLc, (10th March 2023, 10:00
PM)https://www.affluentcpa.com/common-risks-faced-insurance-companies/.
 George Njoroge Ngotho, Effects of Business Risks on Performance of Insurance, (5 th March
2023, 10:00 PM) https://core.ac.uk/download/pdf/224836734.pdf.
 Dr. A.A. Attarwala, C.S. Balasubramaniam, Abhinav Publications, Vol. 3, Issue 11(2011).
 Brainkart, (10th March 2023, 08:00 PM) https://www.brainkart.com/article/Insurance-
Business-Risks_34921/.
 Cameron Easey, Chron, (12th March, 2023, 10:00 AM)
https://smallbusiness.chron.com/risks-insurance-business-16876.html.

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