The insurance business is no doubt all about assessing risk but it is also important to understand how much risk is too much. This is exactly what CFOs of some of India’s leading insurance companies deliberated at the FE Insurance Summit 2024. In a panel discussion themed, “Managing economic challenges in insurance”, industry veterans highlighted the need to keep a close eye on risk and identify opportunities amidst adversity.

Striking the right balance is crucial in the insurance industry as the CFOs struggle to match the balance sheet. Dhiren Salian, CFO, ICICI Prudential Life Insurance highlighted the need to understand the kind of risk and take tactical calls based on that, “There are multiple risks in the life insurance business. Having a close eye on risk is extremely important. Our fundamental philosophy is don’t take on risks that you can’t handle. This is where it becomes important to create and use hedging instruments. That helps take the risk off the balance sheet.”

Ways to leverage the ecosystem

Jitendra Attra, CFO, SBI General Insurance pointed out that there is a need to change approach based on the type of insurance. According to him, “granularity is the key to assessing risk in the general insurance business.” Salian also explained that it is important to “know who and the customer is and their financial position. We have to assess how healthy the customer is and how capable they are in terms of making the premium payment. The trick is to be able to leverage the ecosystem.”

Viswanathan M B, Visiting Faculty at National Insurance Academy added that the “challenge of managing risk is in pricing niche products.” He cited the example of pricing a very niche and had to quantify products like cybersecurity insurance. The actual risk, according to him, “is still a grey area. It is true that the more refined the data is, the better the risk management. But there are going to be unknown aspects in certain products.”

Climate change – An opportunity or risk?

One of the biggest economic risks is posed by climate change at the moment. But Vishwanathan said it may not necessarily be a point of worry- “Anecdotally, natural calamities are likely to impact pricing. It is important to analyse the claim ratio to understand the actual financial aspect. It is also an opportunity for general insurance space.”

According to Salian, “Climate change is a major economic risk element for general insurance. While the health insurance industry saw a spike during Covid, the same analogy may not be true for Climate change. The impact and change in premium may be seen and analysed over a period of time. No immediate correlation is evident.”

Prasanna Kumar C, Sr. Executive Vice President and Head of Financial Services & Professions Group, Aon India Insurance Brokers added that the industry hasn’t yet seen “pricing-in of risk, especially in the backdrop of calamity largely triggered due to climate change. But going forward, looking at the global market environment, it is very important to understand the difference between good risk management Vs bad risk management.”

Rate worries

Lower interest rates have been a point of concern for many industries. Is the insurance industry worried too? Jitendra Attra explained that “investment income going down as a result of lower investment rates could be a tricky situation for the general insurance space. But it can also help in bringing in a lot of under-writing discipline as the leverage from investment reduces. As the industry matures over a period of time, we will see this shift towards a more balanced approach.”

Prasanna too echoed the thought when he said that, “rates need to be a function of risk management standpoint. As an industry, we need to do some work in analysing it, assessing it and differentiating the segment specific rates over next few quarters.”