Insurers' risk management as a business process: a prospective competitive advantage or not?

Danish Ahmed,Umair Saeed Bhutta,Xie Yuantao

doi:10.1108/ejmbe-08-2021-0221

Abstract

PurposeInsurance companies exist to manage the risk of others, which is why they are perceived to be competitive in risk management (RM). Considering this, we investigate how different RM capabilities make insurers effective in RM. These capabilities include understanding risk and risk management (URRM), risk identification (RI), risk assessment and analysis (RAA) and risk monitoring (RMON) activities in insurance companies. In addition, the authors probe how these capabilities can jointly yield a competitive advantage for the insurance industry under the resource-based view (RBV) and dynamic capabilities perspective (DCP).Design/methodology/approachThe authors present a latent variable RM model for the insurance industry and employ structural equation modeling (SEM) to test the hypotheses. Furthermore, the authors also conduct confirmatory factor analysis (CFA) and convergent and discriminant validity analysis for model fit and invariance testing, respectively.FindingsThe results show that insurers who investigated RM-related capabilities directly influence their risk management practices (RMPs). Moreover, improving these capabilities will make insurers more effective in managing the risks of others. Thus, RM as a business process will yield a competitive advantage for the insurance sector. The findings are supported by the theoretical insights presented by the RBV and DCP. Furthermore, the model also adheres to the convergent and discriminant validity cut-off values.Originality/valueTo the best of the authors’ knowledge, this is the first study examining insurers' RM practices as a source of a competitive advantage.

Highlights

The preceding US financial crisis of 2007–2008 wiped out $3 trillion from the global market and mostly affected banks [1]
confirmatory factor analysis (CFA) was performed after removing the outliers from the dataset, as proposed by Kline (2011)
5.3 Discussion Our findings show that comprehensive risk identification (RI), improved risk monitoring (RMON) and extensive risk assessment and analysis (RAA) by insurers will improve the effectiveness of risk management (RM) function

Summary

Introduction

The preceding US financial crisis of 2007–2008 wiped out $3 trillion from the global market and mostly affected banks [1]. Insurers were the third-largest asset managers with portfolios worth $19 trillion; with few exceptions (e.g. American International Group (AIG) & Yamato Life), insurers’ prudent and conservative business policies proved to be resilient. The financial institutions that failed apparently applied sophisticated risk management (RM) techniques, but insurers’ RM practices were stronger. If we examine the other side of the picture, excessive risk exposure and poorly executed or nearly nonexistent management of credit risk made the insurers AIG and Yamato Life insolvent (Pathak et al, 2013) [2]. We present a model determining the antecedents of risk management practices (RMPs) in the insurance industry. Our study draws on theoretical insights from the resource-based view (RBV) and dynamic capabilities perspective (DCP) and investigates how the effectiveness of RM as a business process can yield a sustained competitive advantage for the insurance industry

Results

Discussion

Conclusion