The Kroger Company will be referred to a KR. This paper will cover six topics: (1) analyze factors that affect risk management in the insurance industry; (2) analyze risks specific to the insurance industry; (3) analyze the impact of regulatory and other market factors on expected savings; (4) evaluate financial strategies that can be applied to minimize the risk of loss; (5) analyze expected savings based on proposed risk management strategy; and (6) synthesize analysis into final recommendation for the risk management strategy. Factors affecting risk management in the insurance industry
Insurance Companies compete with one another for a larger portion of the market share. The Bureau of Labor Statistics expects average growth in the insurance industry in terms of the number of new jobs that will be created between 2008 and 2018. With minimal growth to look forward to, insurance agents and companies will have to differentiate themselves in the marketplace by meeting a number of critical success factors” (Lewis, Jared, 2011).
There are numerous factors that affect risk management is the insurance industry. The insurance industry is faced with many different kinds of risk these include these include both insurance-specific risks as well as investment risks.
In the past there has been seen a dramatic rise in the number of insolvent insurers. Some of the insolvencies were precipitated by rapidly rising or declining interest rates. Others resulted from losses on assets such as junk bonds, commercial mortgages, CMOs, real estate and derivatives. Mispricing of insurance policies, natural catastrophes, and changes in legal interpretations of liability and the limits of coverage hurt still others. The rotating of policies by dishonest sales agents, insolvencies among the reinsurers backing the policies issued, noncompliance with insurance regulation, and malfeasance on the part of officers and directors of the insurance companies affected some as well. But despite the numerous and disparate apparent causes of these insolvencies, the underlying factor in all of them were the same: inadequate risk management practices. In response to this, insurers almost universally have embarked upon an upgrading of their financial risk management and control systems to reduce their exposure to risk and better manage the amount they accept. In short, the industry has turned to financial risk management techniques as a way to improve performance. The goal is to offer viable economic reasons for insurance company managers, who are presumed to be working on behalf of firm owners, to concern themselves with both expected profit and the distribution of firm returns around their expected value. The rationales for risk aversion can usefully be segmented into four categories:
* Managerial Self Interest
* The Non-Linearity of Taxes
* The Cost of Financial Distress
* The Existence of Capital Market Imperfections
First, there is managerial self interest. Managers have limited ability to diversify their own personal wealth position, associated with stock holdings and the capitalization of their career earnings associated with their own employment position. Therefore, they prefer stability to volatility because, other things equal, such stability improves their own utility, at little or no expense to other stakeholders. Secondly, there is non-linearity of taxes. Insurance companies levels of performance and market values may be directly associated with volatility for a number of other reasons. The first is the nature of the tax code, which both historically and internationally is highly non-linear. It has recently been emphasized as a key rationale of risk reduction. In each case, the authors indicate that, with a non-proportional tax structure, income smoothing reduces the effective tax rate and, therefore, the tax burden shouldered by the insurance company. By reducing the effective long term average tax rate, activities...