Risk Management Process for Insurance Professionals

What does a risk manager do? Very simply, a risk manager improves the bottom line by making risk less risky. Maybe that doesn’t make as much sense as I thought it did. Let me back up a step and give you a working definition of risk and what a risk manager does. Ready?

Risk describes any situation that has an uncertain outcome.

When you boil everything down to its smallest parts, whenever we feel that something is risky, it’s because we can’t predict accurately enough what the outcome will be. So then, what does a risk manager do? Taking our definition of risk:

A risk manager reduces risk through choosing which actions to take to reduce uncertainty.

I know, it’ sounds like an oversimplification, but that’s how we build understanding. We take things to the lowest level we can, and build from there. If you disagree on my definition, please feel free to let me know in the comments. I have thick skin. I can take it.

Why are we talking about this today? Very simply, I believe that insurance professionals can take cues from the world of risk management to better do their jobs and to make like better for their customers. It’s very easy today to get a phone call from a potential customer, take their insurance order, place coverage, cash the check, and move on. However, that’s what the internet insurance sites do. Is that what you want to be? You want to be like those sites that say, “We won’t ask you a bunch of questions. Just put your address in and we’ll give you an insurance quote.” Is that right?

It’s possible, however that you want to serve your customers in a different, better way. I think that no matter how you got into insurance, you really want to help people. When you go home at night, do you tell stories about the number of payments you got, or are the interesting stories in the people that you met and helped? Since I’m already convinced that you want to help people, let’s move on to another thought.

Risk managers go through a process to reduce uncertainty. Even if you deal with only small personal lines customers (they have a homeowners’ policy or an auto policy with your office), you can benefit from going through this process with your customers. To be really fair to the process, maybe a better title would be the risk management cycle. Process does indicate that there is an end to it. Cycle is more accurate because a cycle brings us back around to where we started again and again. Here’s the cycle: identification, analysis, control, financing, and monitoring.

Let’s start at the beginning (a very good place to start). The first step is identification. We have to see what risks surround us before we can do anything with them. Did anyone ever tell you that what you don’t know can’t hurt you? Yeah, that’s a total lie. Sorry to burst that bubble, but we all have bubbles that need to be burst. What you don’t know can (and likely will) hurt you. When was the last time you were blindsided by something that happened? One of your first reactions was, “I didn’t see that coming.” Risk identification is about trying to see what’s coming. What you don’t identify can’t be managed.

The next step is analysis. Once you’ve identified those risks that you need to manage, you have to spend some time thinking about them. According to dictionary.com, analysis means, “this process as a method of studying the nature of something or of determining its essential features and their relations:” Think about analysis like taking apart a car engine. As you take the engine apart, you take note of every part and how it works with the rest of the parts. You see how they fit together. You learn that they only fit together in just the right way, otherwise it doesn’t work. Once you get it all apart, you have a better understanding of how it works and why. That’s what we’re doing when we analyze the risks that we’ve identified.

Once a risk is identified and analyzed, it needs to be controlled. If risk management is a process meant to reduce uncertainty, you can’t stop at building up your awareness of the risks and how they work. Do you know what people are that identify and analyze their risks and don’t do anything about them? They are terrified. You have to do something with them. Stopping here is like going to the eye doctor, getting a diagnosis that you need glasses and then not getting glasses. There are several ways to control risk so we really can’t go too deep now. Maybe we’ll be able to write more about these steps later.

The next step of financing risk is a way of recognizing that there are certain risks that you can’t control completely. There are risks that may just cost you something. Risk financing is thinking ahead about how you’re going to pay for it if something happens. We all know that there are things that might cost us something, but we also know that we haven’t set aside money to pay for it (don’t you have a deductible on your auto policy?). When we talk about financing risk, we are trying to consider where the money is coming from to pay for it when the loss happens.

The last step in the process is monitoring the risks. Things change over time. It can’t be helped. The only way to make sure that risks are still managed properly is to continuously watch for changes. It’s not that you have to check in with people every day, but you have to be paying attention. What does this look like from a practical standpoint? It could be a phone call or a visit. It could be a formal meeting.

Here’s where the process turns into a cycle. Once you have spent some time monitoring risks, you will find that things change. If they’ve changed, you have to go back through the process of identifying, analyzing, controlling, financing and monitoring all over again. Is it extra work to do this? Yes. Is it worth doing it? Yes. YES. What’s the end goal? Building relationships with your customers that last beyond the expiration date of the auto policy.

Topics Risk Management