What Are the Risks Insurance Companies Face

Cybersecurity risk, underwriting risk and catastrophic risk are the risks that insurance companies face. 

FREMONT, CA: The concept of risk in insurance is multidimensional. Without any risk in the world, policyholders would not require insurance coverage, and the industry would cease to exist. However, if insurers take on too much risk, they risk overextending themselves and losing earnings as claims increase. Thus, risk management is essential for every successful insurance organization. It is how insurers strike the delicate balance in determining which applicants to cover, what premium to charge, and other operational decisions that influence risk levels.

Insurance companies face the following types of risks:

Operational risk: Organizations must cope with operational risk in all lines of business. Humans make mistakes, technology fails, and insurers must be ready for any internal processes or obstacles that may disrupt operations. While it is not possible to eliminate all operational risk, insurers may reduce its impact by investing in proper systems, people, and procedures.

Underwriting risk: Insurers' primary risk is insufficient underwriting processes, which result in the company paying out more money in claims than it collects in premiums during a given time. This can have a direct influence on the insurer's bottom line, so underwriting risk remains an important consideration.

This issue usually arises because the insurer's underwriting team lacks the tools and knowledge to appropriately analyze the risk of extending coverage to a specific policyholder. In other words, the team lacks data, allowing them to reject an application or raise the premium to compensate for the greater risk. 

Cybersecurity risk: As the insurance industry becomes more digital, insurers must deal with increased cybersecurity threats such as ransomware attacks, data breaches, social engineering attempts, and so on. According to recent research, three out of every four organizations in the United States are vulnerable to a major cyberattack. This is a growing threat that insurers must address in order to protect both their company data and sensitive policyholder information.

Catastrophic risk: Certain risk factors are completely beyond an insurance company's control, such as catastrophic risk from natural disasters, pandemics, or other large-scale catastrophes. Any of these occurrences could trigger a surge in claims, potentially exceeding the company's ability to pay.

Regulatory risk: The insurance industry is well-known for its strict regulations and red tape. While compliance with rules may increase the administrative burden on insurers and their teams, the risk of non-compliance can be costly, leading to taxes, penalties, or other restrictions that hinder normal operations.