Introduction
There is a dearth of research on enterprise risk management (ERM) in the Indian insurance sector. The research started in 2020 to identify the inherent embedding of ERM within the Insurance sector in India. There are a couple of objectives to unearthing the ERM position; one is identifying the ERM implementation challenges in the insurance sector. Upon reviewing various research papers globally on ERM in the insurance sector, it is found that very few papers are written on ERM implementation challenges. However, such papers are written in other areas, such as construction and other industries.
This article is a snapshot of ERM implementation challenges identified by discussing the current position within the insurance sector in India with Chief Risk Officers, Heads of Risk, and other personnel working in the Risk Team.
Importance of ERM in Insurance
Risk is inherent in the insurance business, where customers transfer their risk to the insurance company. Premiums collected from the customers are the cost of the risk; however, not all risks, such as Operational Risks, Cyber Risks, and Regulatory risks, can be priced, necessitating the need for ERM. Over the last 20 years, it has been observed that many global events, such as the 2008 economic crisis and COVID-19, have had significant adverse impacts on the insurance industry. Property insurance prices in the US and Australia are increasing due to rising claims from floods and natural calamities. The Indian market has witnessed repeated capital injection by the Government to the three nationalised general insurance companies. Further, few private insurance companies have undergone mergers and acquisitions. The insurance industry must prepare for the forthcoming climate risk, which could lead to an unprecedented increase in claims. In 2024, the country had already observed increased rain and floods, which may lead to increased non-life claims. Given the increasing uncertainties, ERM becomes vital for the insurance sector to serve better customers who are ultimately dependent on their financial security.
Challenges Identified in Implementing ERM
The interview suggested that some insurance companies identify many risks; however, some focus on the top 10 to 20 risks. The challenge in identifying too many risks is losing focus on key risks. One of the most clear challenges that came out was regarding three lines of defence. In many insurance companies, the difference between the first and second lines of defence is blurred. In some insurance companies, the second line finds it challenging to get data from the first line for risk analysis; most respondents recommended setting up a centralised database.
The respondents mentioned less of a challenge in quantifying financial risk than non-financial risk due to the difficulty of attaching a monetary value. It was highlighted that inadequate investment in risk training and education leads to untrained resources.
Inadequate risk training also adversely affects risk mitigation activities. Senior management understands risk language; however, the same is not valid with lower-down employees. In most insurance companies, the risk culture is underdeveloped, such as the infrequent tone from the top. The concept of Risk Champion is developing.
Insurance companies monitor risks; however, many times, risks are backwards-looking due to an audit mindset. Insurance companies set risk appetites, but only a few use them for decision-making and monitoring.
Risk reporting occurs quarterly in the risk management committee; however, risks are sometimes underplayed.
Conclusion
Insurance companies in India have an ERM framework; however, implementation challenges exist. The insurance companies’ boards and regulators need to work to address these challenges and develop robust ERM practices. A more detailed paper is being prepared to understand the ERM implementation challenges fully.
Authored by :
Sonjai Kumar, Certified Fellow of the Institute of Risk Management, London; Post Graduate Diploma in Actuarial Management, City University, London & Research Scholar in Risk Management, Fortune Institute of International Business, New Delhi, India and,
Dr Purnima Rao, Associate Professor, Fortune Institute of International Business, New Delhi, India
This article is an extract from PhD thesis on enterprise risk management research in India’s insurance sector.
