The Insurance Industry in Germany

The insurance industry around the world has greatly evolved with more businesses and individuals insuring their assets against the increased risks. They are underwriting to safeguard their enterprises from unplanned damages from certain undesirable events such as fraud, fire, and natural catastrophes among other forms of risks. Financial institutions have widely embraced enterprise risk management (ERM) as a practice in their ongoing operations and structure as a shock absorber against the volatile markets, low-interest rates, and depressed returns. However, ERM has remained under-utilized and misunderstood despite its advantages in offering insurers a more robust approach to manage the risks. According to Eckles, Hoyt, and Miller (2014), ERM provides value through offering insurers an enhanced ability to manage risk and conduct business in a better tactic, they have gained a new insight via the new technology and vast amounts of data that they must process, and insurers are now able to manage operational risk to guarantee effectiveness and increase their resilience.

Eckles et al. (2014) argue that the enterprise risk management is a process that is applied to a business to highlight potential events that may impact the firm. The process ensures that the risks are managed to remain within the capacity of the company to guarantee achievement of organizational objectives. The practice involves the management, board of directors, and other staffs in a business who implement ERM processes to improve the efficiency of risk management undertakings. However, a number of insurers do not obtain the full benefit of ERM as they are unable to properly prepare, integrate, and recruit the right people in place. Therefore, it is crucial that firms start a strategic transition to ERM using the right approach. Altuntas et al. (2011) explain that the risk management process begins with risk identification, then risk evaluation, and lastly choice and execution of suitable risk management tools. This paper examines insurance firms in Germany and how they have integrated ERM. 

Identify and Evaluate the Organizational Environment in Relation to Corporate Governance, Line Management, And Portfolio Management

Corporate Governance

            Corporate governance is an important organizational concept in the insurance industry as it directly influences risk-taking within a company. Corporate governance is the primary means that stakeholders use to gain control over the management of a firm and its employees in order to protect their own interests. There exist different corporate control systems including the two-tier structure that is famous among Germany based insurance companies. Altuntas et al. (2011) explain that this system has executive and supervisory boards which are separate and hold isolated meetings. The executive also referred to as the management board is in charge of running the corporate while the supervisory board is mandated with supervision, appointment, and discharge of members of the executive team. Therefore, the supervisory board has control over the executive to ensure they comply with the laws and articles of the organization and they are in line with the business policies. However, the supervisory board cannot be openly tangled in running the business. Altuntas et al. (2011) explain that having the supervisory board members perform more mandates has a negative effect on the quality of the organizational performance as they become unable to fulfill their function.          

Line Management

Line management in the Germany insurance industry involves front-line managers, supervisors, and team leaders. There is also a team of specialist experts in forensic accounting, corporate expertise, risk management, and law who lead a team to ensure the clients receive the best services. These employees have a great influence on the performance and engagement of their followers within the different companies. Insurers have invested in training the teams involved in line management in order to improve business performance by promoting innovation to suit the rapidly emerging market and the varying risks. In addition, they are provided with the rights tools such as adoption of technology that help them execute their roles and responsibilities. 

Portfolio Management

            Portfolio management is a critical function for insurance providers as it is the key to profitable underwriting. Insurance companies in Germany are focused on improving the response to emerging threats by enhancing their portfolio management. The insurers are utilizing the new technology to improve their products and services by having effective data sources and analyses and have employed expert analysts who are able to assess and explore portfolio deficiencies and opportunities. Today, the portfolio of the insurance industry has greatly evolved with players being able to act appropriately to threats. Companies such as Allianz SE have introduced new technology-based insurance products. The firms continue to develop new insurance products such as insurance for mobile devices or against cyber-attacks and risks. Furthermore, portfolio management has enabled insurers to offer risk prevention services that are based on technology. Customers can access their insurance policies and communicate with their insurers using mobile devices or desktop through a customer portal.    

Alternative Risk Transfer Instruments That Would Fit in The Industry

            Banks (2013) defines alternative risk transfer (ART) as the use of additional techniques other than the traditional approaches in insurance and reinsurance to provide insurers with a coverage or protection. ART helps transfer certain threats away from the insurance company as third parties are involved to offer protection against risks that are perceived in a transaction. Alternative risk transfer instruments such as catastrophe bonds allow capital market investors to take a direct role in providing protection. The capital market offers the insurance industry a solution to the concerns of insufficient capacity in the reinsurance industry. Securitization of the catastrophe risks helps absorb the losses that result from mega disasters. The securities provide risk-transferring alternatives to ease catastrophe shocks within the industry.  

Catastrophe Bond

            Schultz and Lakshmanan (2014) explain that catastrophe bonds are risk-related securities that transfer certain set of risks from an insurer to investors. In recent years there has been an upsurge in the frequency of catastrophes which has attracted firms to offer insurance against catastrophic risks. However, these calamities are sometimes destructive and require a huge compensation for the damages and losses. Companies may find the coverage costs to be too high and they are forced to reinsure their contracts. Reinsurances ensure the insurers are compensated for partial or total losses that are incurred during a catastrophic event. According to Banks (2013), CAT bonds are popular in the economy as their payoff structure benefits both the investors and the insurers. They offer appropriate hedging facilities for insurers as they provide capital release particularly when they need a huge capital capacity to reimburse the coverage of the customers whenever disaster events occur.

On the other hand, investors who purchase CAT bonds boost their portfolio performance. Banks (2013) explains that the investors hold portfolios that consist of equities and bonds. Also, the CAT bonds have a specific provision of debt-forgiveness that has set them apart from the traditional bonds (Banks, 2013). This provision is important in cases where the catastrophic event that has been insured against occurs prior to the maturity of a bond. Triggering of the debt-forgiveness provision requires CAT bond issuers to return part of the principal or interest payments thereafter until maturity. The trigger point is determined by the actual losses that the insurer suffers while the principal or interest payments are pardoned totally, partially, or proportionally to the actual losses.     

The Current Role of Data and Technology in Strategy Development

            Eckles et al. (2014) assert that the insurance industry is highly reliant on data and data analysts. There is a massive inflow of data that must be managed and implementing a technology offers a platform for clients and insurers to access accurate records. Having an appropriate data and technology is important in strategy development as the insurer can access relevant data, analyze it, and come up with the best decision. The advancements in technologies that have been witnessed have positively impacted operations within the insurance industry. It is important that executives, managers, and employees have the opportunity to access the accurate information at the proper time as data drives important aspects of the business. They are able to analyze crucial customer data, gain new insights into how they can be able to offer better services to customers and develop appropriate business strategies.    

The Linkages Between Risk Analytics and Stakeholders

            Today, insurers are focused on enhancing their analytical capabilities as many of the transactions have become data-driven. Firms are conducting consumer research and are forced to improve their systems in order to be able to extract and scrutinize the correct set of data into a merged client database. In addition to the systems, companies are employing the services of risk analytics who help improve the performance of the business. The stakeholders play a critical role in the process as their involvement helps the risk analytics to identify needs within the society.

Conclusion

The insurance industry has become volatile with increased frequency of catastrophe events. The companies in the industry are coming up with new approaches to ensure they remain profitable and do not depend on external financiers. Enterprise risk management is focused on identifying likely occasions that may have an adverse effect on an enterprise and manage the risks to remain within the capacity of the business. ERM attempts to reduce negative cash flows and earnings through identifying profitable opportunities that would benefit the shareholders. This paper has focused on Germany insurance companies to understand the concepts of corporate governance, line management, and portfolio management. The insurers are increasingly implementing ERM and technology to improve operations. In addition, there is the use of alternative risk transfer that provides insurers with a coverage against risks that are perceived in future. Catastrophe bonds are an ART approach that involves investors in the capital market who absorb total or partial results of a mega disaster.

References

Altuntas, M., Berry-Stölzle, T. R., & Hoyt, R. E. (July 25, 2011). Implementation of Enterprise Risk Management: Evidence from the German Property-Liability Insurance Industry. The Geneva Papers on Risk and Insurance - Issues and Practice, 36, 3, 414-439.

Banks, E. (2013). Enterprise Risk Management, in Alternative Risk Transfer: Integrated Risk Management through Insurance, Reinsurance, and the Capital Markets.

John Wiley & Sons Ltd, Oxford, UK.

Eckles, D. L., Hoyt, R. E., & Miller, S. M. (2014). The impact of enterprise risk management on the marginal cost of reducing risk: Evidence from the insurance industry. Journal of Banking & Finance, 43, 247–261

Schultz, P., & Lakshmanan, E. (January 01, 2014). An overview of CAT bond market: Before you invest in catastrophe bonds, make sure you understand how the market is going. Mass Transit, 40, 6.