Sound ERM captures stakeholder biases: Why behavioural risk matters

Insurers traditionally monitor conventional risks as part of their enterprise risk management (ERM) programs, but there is also much value to tracking behavioural risk in their risk mitigation efforts. Insurers' ERM concentrates largely on risks such as mortality, reserving, underwriting, catastrophe, financial and operational.

Policyholder behavioural analysis is also a focus, particularly for life insurers. This article argues that insurers should incorporate their stakeholders' risk behaviour into their ERM framework. The Basics of Behavioural Economics Conventional neoclassical economics assumes individuals have rational preferences among outcomes and act rationally to maximize utility given these preferences. The recent discipline of behavioural economics explores the limits of conventional economics but also relates directly to risk culture. It incorporates insights from psychology, particularly ways in which social, cognitive and emotional factors often cause individuals to act irrationally and demonstrate biases in behaviour and decision making, especially when faced with risk and uncertainty. Understanding behavioural economics will help chief risk officers (CROs) make appropriate risk-related decisions. Risk management is intrinsic to insurers' very nature and economic rationale. It is essential for a CRO to understand the biases of the company, customers, shareholders and competitors; help individuals to manage them; and understand the implications for the firm's wider risk management framework and its external actions

Source
Towers Watson
Length of Resource
4 pages
Author
Towers Watson
Date Published
Publication Type
article
Resource Type
commercial

ResourceID: 67491

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