Insurance Companies specialize on Customers Risk, But are they focussing on their own Operational Risk ?

5 minute read


The entire concept of insurance is entwined with Risk. People focus on various insurance schemes in the forms of life, health and motor in order to mitigate the risk that they face in their everyday lives. It is hard to anticipate beforehand the likelihood of danger you may come across which would hinder you from your dreams & goals. Let it be a vehicle accident, a critical illness or an unfortunate untimely death, an insurance will provide you with some compensation compared to a situation of total helplessness. It should be noted that even though insurance is unable to restore every threat which occurs it provides reasonable assurance.

The Insurance companies helps us to mitigate our Risk. But do the Insurance companies themselves face Risk? And if so, how are they going to mitigate their Risk?

The focus of this article would be on identifying the Operational Risk, which Insurance Companies across the globe face, while they seek to reduce the risks faced by their customers. It would be ironical if Insurance companies themselves do not focus on the operational risk that exist within their own organizations.

According to the Coalition Against Insurance Fraud Estimate, “Insurance companies lose $80 billion per year in insurance fraud across all lines of insurance.” The vulnerability of insurance companies towards risk and the impact is highlighted through statistics. However, the focus here would be only on the operational risk which the insurance companies are inherited with. These operational risks are mainly due to fraud, human errors and incompetent processes. In order to tackle these risk scenarios lets categorize the risk for better understanding.

Operational Risk can be broadly categorized as,

  • Industry Specific Operational Risk
  • Common Operational Risk
  • Company Specific Operational Risk
  • The categorization is simple enough and self explanatory.

When we analyze the Insurance industry, compared with other industries it possesses greater risk in higher magnitude due to the nature of operations. Insurance fraud is a common term that we hear and has many forms. Due to this nature new legislations have been drawn which highlights the importance. The state of Pennsylvania now considers medical insurance fraud as a felony, where the violators can be sentenced up to seven years in prison and spend up to $15,000 in fines.

It is important to highlight that Insurance companies are present with the challenge of managing massive amounts of customers, claims and related operations. In such a scenario practically it is difficult to focus on each and every individual fraud which result in risk. The most intelligent and convenient methods of mitigating the fraud would be to use data and analytics to help with the physical manual processes of preventing operational risk. Using a data driven approach would also be competent enough to uncover hidden fraud activities which are developed to fool the naked eye. Analytics could effectively be used to uncover Insurance Industry Specific Risks such as Bonus Exploitations done by insurance agents, Exaggerated Claims made in motor insurance, Medical Fraud, Potential frauds through past postings and insurance policy misrepresentations.

Insurance fraud may come in many forms as identified above and there are many stakeholders involved. Most of the risks due to fraud could be mitigated through the use of sound processes setup to thoroughly investigate once insurance claims are made. The processes which are setup would vary between different insurance companies and each individual company may require internal controls which are capable of mitigating the risk. These internal controls could be in the form of flagging claims above certain limits or investigating multiple claims which occur in close proximity in time.

Although physical controls are essential to mitigate the risk the above mentioned internal controls emphasizes us the importance of a data driven approach of facing operational risk. In todays context many companies are focusing on data driven approaches to battle risk. This signifies the importance of setting up data driven systems which could automatically flag claims with potential fraud according to the rules and internal controls which are setup by your company. This would enable in minimizing the Company Specific Operational Risk.

In each industry, Common Operational Risks are present which are mainly in the form of duplicate transactions, Missing Records, gaps in transactions and other errors made by data entry operators.These are un avoidable human errors. Hence proper structured systems should be in place to ensure that such errors are minimized and identified in order to eliminate potential losses to a company. Although one may think that these risks are negligible when compare with the above, it’s important to note that these could also have larger impact in instances where multiple claim payments are carried out due to the duplication of a claim record. The general intuition is that such cases may not occur. However, studies have identified such instances and the importance of proper controls to eliminate them.

In conclusion Insurance is an industry which faces massive operational risk due to the nature of its operations. Hence it is important to focus different types of operational risk and ensure proper action is carried out towards risk mitigation. Also it is of great significance to note that a data driven approach towards managing risk would be a futuristic solution which yields numerous other rewards in the form of performing customer, agent specific ad hoc analysis to gain business intelligence to work on effective business strategies.


  • Fraud Data Analytics Methodology by Leonard W. Vona