In late 2008, the The CAS, CIA, and the SOA’s Joint Risk Management Section funded a research report about the Financial Crisis. This report featured nine key Lessons for Insurers. Riskviews will comment on those lessons individually…
6. Insurers must pay special attention to high growth/profit areas in their companies, as these are often the areas from which the greatest risks emanate.
All high growth areas are not risk problems, but almost all risk problems come from areas of high growth.
And high growth areas present several special problems for effective risk management.
- High growth in the financial services field usually results when a firm has a new product or service or territory. There is almost always a deficit of experience and data about the riskiness of the new area. Uncertainty rules.
- In new high growth areas, pricing can be far off the mark at the outset. If the initial experience is benign, then the level of pricing can become firmly set in the minds of the distributors, the market and the management. When adverse experience starts to undermine the pricing, it may be initially dismissed as an anomaly, a temporary loss. It may be very difficult to determine the real situation.
- If risk resources were included in the plan for the high growth activity, they were probably not increased when the growth started to exceed expectations. As growth occurs, the risk resources are most often held at the level called for in the initial plan. Any additional resources that are applied to the growing area are needed to support the higher level of activity. Often this is simply a natural caution about increasing expenses in what may well be a temporary situation. This caution is often justified as growth ebbs. But in the situations where growth does not wane, a major mismatch between risk resources and business activity develops.
- There is usually a political problem within the firm. The management of the highest growth area are most likely the current corporate heroes. It is very highly unlikely that the CRO will have as much clout within the organization as the heroes. The only solution to this issue is support from the CEO for the importance of risk.
- Risk efforts need to be seen not as “business prevention” but as a partner with the business in getting it right. This is difficult to accomplish unless risk is involved from the outset. If the business gets going and growing with procedures that are questionable from a risk perspective, then it is quite possible that changing those procedures might well hurt the growth of the area. Risk needs to be involved form the outset so that appropriate procedures and execution of those procedures does not become a growth issue later on.
This is the most difficult and important area for the risk management of the firm. The business needs to be able to take chances in new areas where good growth is possible. The Risk function needs to be able to help these new activities to have the chance to succeed.
At the same time, the organization needs to be protected from the sort of corner cutting that leads to growth through drastically under-priced risks.
It is a delicate balancing act that requires a high degree of political skill as well as good business judgment about when to dig in the heels and when to let go.