Risk Framework Analysis

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Table of Contents Introduction Types of Business Risks Risk Framework Strategies and Initiatives of the Selected Companies Effective Risk Management Framework of Abu Dhabi Insurance Company A·Assessment Techniques A·Effectiveness Measures Risk Management tools in Market International Insurance Company Abu Dhabi National Insurance and Market International- A comparison of financial statements 1.Capital management framework: 2.Regulatory Framework: Conclusion References Comparison of risk management between Abu Dhabi National Insurance Company and Market International insurance company.

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Introduction

Risks are a natural part of all types of businesses. Every organization be it a public or private sector organization has to face several kinds of risks. These may be systematic or unsystematic risks. No matter whatever is the type of risk, it needs to be assessed as soon as possible and it must be countered by using the most effective tools and techniques. For this purpose, various risk management frameworks have been designed (Zelenskaya, 2013). This paper attempts to analyze the risk management frameworks of two insurance companies, one of which is based in Abu Dhabi and the other one is a foreign international company. The paper will explore the similarities and differences between the methods of risk measurement used by these companies and their impact on the organizational performance.

Types of Business Risks

Risk refers to the chance of suffering any kind of financial loss by the company. It is a danger for the organization because it presents a threat to financial returns of the company. Following are the different types of risks usually faced by any business:

  1. Strategic risk occurs in an industry because of changing customer demands or preferences or by the emerging technology of the competitors. This risk can be countered by collecting timely feedback from the customers.
  2. The second is the compliance risk which occurs due to bureaucratic or regulations and thus impacts the investment procedures of the company.
  3. Another most important type of risk is the financial risk which impacts the gross profits of the company which is one of the objectives of the organization therefore; this risk must be immediately countered.
  4. Moreover, the company might also face operational risks which might occur due to the internal processes, systems or people of the company. Sometimes, it might also be due to external factors.
  5. One kind of non-financial risk is the reputational risk which has the capacity to harm the business to a great extent. It might occur due to product failures or other similar procedures. This might result in loss of a large number of customers. Reputations take lots of years to establish but they can be destroyed in a single day or even by a single wrong activity
  6. Apart from the above mentioned categorized risks, there are several uncategorized risks for example: there might be any disturbances due to natural disasters, high employee turnover and so on. (Griffin, n.d.).

Thus, it can be said that the business environment is never safe. It always faces many risks which need to be resolved through the development of proper frameworks. It is not necessary that every firm is facing all of these risks at the same time. Major types of problems that are associated with the insurance companies are insurance related risks, financial instability, loss of customers, transfer risks, underwriting risks and so on. All of these must be assessed in order to make sure that the company is moving in the right direction to achieve its goals and objectives (Jolly, 2003). Before moving on to analyze the risk assessment frameworks used by the selected companies, a brief overview of risk frameworks is presented below in order to develop a deeper insight into how these organizational structures counter the financial and other related risks.

Risk Framework

A framework refers to a systematic tool used to counter all the types of risk mentions. For instance: company might use specific software for this purpose, some other company might use spreadsheets, internally developed system of the company and so on (Shortreed, Hicks, & Craig, 2003). Any risk management framework is based upon proper timeline of procedures which have the following aims:

  • To make the organizational operations more smooth, transparent and easy to understand for the stakeholders.
  • To make all the organizational processes more efficient and effective
  • To allow proper risk assessment, estimation, monitoring and control in terms of standard procedures and methodologies.

No matter what is the type of method used, the risk measurement basically follows the analysis of following steps or procedures:

  • The first step is to categorize the type of risk being faced by the company.
  • After that, the right kind of system must be selected according to the categorized risk. There must be proper compatibility between the two factors i.e. the risk and the selected system.
  • The company must then assess how it can reduce the level of the selected risk.
  • After assessment, proper implementation procedures must be designed and followed.
  • The system must be authorized to measure any risk related changes in the operations, individuals and systems of the company.
  • In the end, the company must monitor whether its selected system has proved to be successful in the reduction of risk or not.

Strategies and Initiatives of the Selected Companies

The study conducted on Abu Dhabi Insurance Company and Market International shows that both the companies use highly effective risk management procedures. Abu Dhabi Insurance Company allocates almost 20% of its budget to risk assessment and control while the insurance company of US devotes almost 25% of its budget to risk control. This is because the latter believes that it has to face more diversity of risks therefore; the framework of budget for the two companies is also different. Insurance risks and market risks are becoming greater with the passage of time because the business world is too dynamic. Therefore; these risks are related to the internal activities of the organization.

Effective Risk Management Framework of Abu Dhabi Insurance Company

This company uses the ERM framework to assess and control the risks associated with its business. The company has designed proper mechanisms to measure where the gap exists between the actual and the expected performance and what are the reasons of this gap. Moreover, the company has developed a proper department which has risk supervisor managers who prepare manuals and documents that highlight the major problem areas of the company. These documents are then circulated to all the relevant departments in order to make sure that every member of the company is on the same page.

A· Assessment Techniques

While assessing the risks, the company has designed proper methodologies to that measure the design and performance of the company. These techniques also explain what would be the most effective tools to overcome risks. The dynamics used for assessment are the compliance methods which regulates the performance against specifically set standard procedures.

A· Effectiveness Measures

After making risk assessments, effectiveness of these components are measured in a variety of ways. These measures tend to improve the transparency, confidence, decision making and control procedures of the company. The CEO of Abu Dhabi National Insurance Company has emphasized on the important of all these measures and has communicated it directly to the employees of the organization so as to make sure that there are individual as well as collective efforts being made towards reducing the risks and increasing organizational productivity. Following is an illustration of the risk management framework used by Abu Dhabi National Insurance Organization: This framework provides a deeper insight into all the factors affecting the organizational smooth operations. It is used by Abu Dhabi National Insurance Company by the mangers designed specifically for this purpose. All of the factors mentioned in the table are market as either high, medium or low with different colors which indicates the level of the risk and its capacity to harm the organization. High risk Medium risk Low risk

Risk Management tools in Market International Insurance Company

Since the organizational structure of both these companies is more or less similar, therefore; there are a huge similarities between the types of risk they face in their respective environments. Despite of these similarities, many differences exist between the risk management tools designed by these companies (Chapman, 2011). Market international has a triangular risk framework which bases the whole process on three major things which are illustrated below: This is the major framework followed by the Market Insurance Company. The corporate managers or the stake holders engage in the decision making process and these long term strategic decisions include such activities which would manage and monitor the involved risks. The company uses various risk treatment procedures to evaluate these frameworks in order to resolve any issues that haunt the company’s effectiveness. In order to follow this framework, a preliminary analysis is carried out before the treatment. It can also be referred to as the screening level of identifying the financial risks which occur when the company does not get expected returns or when the customers leave the company. For this purpose, Market International engages in the following procedures:

  1. Risk Estimation is done to measure the magnitude of risk probability and its related consequences.
  2. Evaluation is done in order to measure the risk against the criteria or costs and benefits as well as the demands of stakeholders.
  3. There have been various treatment options that have been developed to bring down the risk to an acceptable level.

Establishing the criteria has always proved to be a challenging task for insurance companies because of their dynamic and complex environment. However, Market International has developed proper consideration methods to deal with this issue.

Abu Dhabi National Insurance and Market International- A comparison of financial statements

Developing frameworks and tools for risk assessment and measurement is just one of the objectives. The real aim of this project is to analyze to what extent, these different tools of insurance companies have been able to reduce the level of risks they had. This can be done by looking at the values provided in the financial statements of both the companies and then analyzing these values. The values from consolidated financial statements of Abu Dhabi National Insurance Company for the year 2011-2012 are as follows: Most of the risk was insurance risk caused due to marina cargo, engineering insurance, health and motor insurance, group life insurance, property and liability insurance, aviation insurance, accident insurance and so on (ADNIC, 2012). In order to counter these risks, the company used the following two major frameworks:

  1. Capital management framework: This was used to protect the goals of stakeholders and to achieve financial performance objectives. This internal tool analyzed the amount of capital needed to mitigate the risk and then economic impacts of this capital were used to resolve the loss crisis (The new risk and capital management framework, 2012).
  2. Regulatory Framework: This was used to manage and monitor the internal affairs and to ensure that the company maintains a solvency position to reduce the financial risks and the risks arising from natural problems. Regulations were imposed to carry out smooth operations and to reduce any kind of insolvency found within the organization.

On the other hand, Market International also incurred 45% and 47% loss during the last two years and the major methodologies used by this company to counter these risks was the portfolio approach. The use of portfolio framework provided the stakeholders with right information regarding risk estimation and measurement and the stakeholders then engaged in the decision making process to mitigate these risks. Both of these techniques have proved to be useful in measuring and reducing the level of risks associated with these insurance companies (Culp, 2002).

Conclusion

Thus, the above project clearly indicates that risk is a natural part of any business enterprise. Insurance companies use different types of approaches to reduce these risks. Different frameworks and tools used by ABNIC and Market International show that financial risk can be best mitigated by developing the right kind of approach and then implementing this approach and framework in order to make sure that the company is progressing financially as well as non-financially.

References

ADNIC. (2012, December 31). Director’s report and consolidated financial statements. Retrieved from https://www.esca.ae/English/Secured/Companies/Financial_Reports/annualreports/ADNIC2012EN.PDF Chapman, R. J. (2011). Simple Tools and Techniques for Enterprise Risk Management. Wilay Publishers. Culp, C. L. (2002). The Risk Management Process: Business Strategy and Tactics. Wiley Publishers. Griffin, D. (n.d.). Retrieved from https://smallbusiness.chron.com/types-business-risk-99.html Jolly, A. (2003). Managing Business Risk. Kogan Page Publishers. Shortreed, J., Hicks, J., & Craig, L. (2003, March 28). Basic Frameworks for Risk management. Retrieved from https://www.irr-neram.ca/pdf_files/basicFrameworkMar2003.pdf The new risk and capital management framework. (2012, February 27). Retrieved from https://www.actuarialeye.com/2012/02/27/icaap-the-new-risk-and-capital-management-framework/ Zelenskaya, A. (2013, February 19). Framework for Improving Credit Risk Management Using Champion/Challenger Approach. Retrieved from https://www.scorto.com/blog/framework-for-improving-credit-risk-management-using-championchallenger-approach/

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