Layoffs Elevate insurance industry operational risks

23 April 2009 (Datamonitor via COMTEX) - Insurers around the world are reducing in order to remain viable in this difficult market, raising the risk of employees critical errors, or to engage in acts of retaliation . Companies looking to protect themselves from these hazards should consider investing in solutions that reduce operational risk.

Credit and market risk are major concerns for insurers. As insurers to review the past year, it is clear that in the simplest terms, poor lending practices (credit risk) coupled with the fall in house prices (market risk) has triggered the economic slowdown. Accordingly, a number of companies have collapsed, were sold at the sale price of fire, or are supported with government dollars. Insurers holding bonds of these companies deceased or disabled by writing the value of their investments, which is a credit risk itself.

Operational risk, which is the third pillar of business risk has not been the focus of the current crisis. There is a growing concern, however, largely because of rising layoffs. The United States funds and the insurance industry, for example, witness the events of 88 layoff of 50 or more employees in January 2009, an increase of 76% over the same period the previous year and more than double the number of events in December. Genworth Financial, ING, Allstate and Lincoln National are just some of the insurers that have made headlines by announcing more than 500 redundancies. More recently, Swiss Re has announced a plan to dismiss 1,200 employees around the world. As a result of increased job losses, 45% of financial services, respondents to a survey by the Global Association of Risk Professionals (GARP) said that operational risk has "increased significantly".


Redundancies raise operational risks in a number of ways. Employees who are sufficiently durable to be laid off still have a certain level of operational knowledge. When these people out of the door, the information goes with them. By losing that historical knowledge, insurers - or any company for that matter - are at risk of losing critical business processes. In addition, fewer employees means that there are not many people who can identify errors, which is particularly worrying given that layoffs generally increase stress and workload, and hence higher error rates for the remaining employees.

Employees who have been or are afraid of being dismissed from a risk of fraud or retaliation to the insurer. With embedded knowledge, employees in May drives also have sources of information in the form of printed documents he sent by e-mail to personal accounts or stored on USB keys. This information may be disclosed to competitors or customers. The risk-reward calculation fraud also reduced changes in the environment. An officer who claims never to have been involved himself in such a system during periods of high job security in May begin to think differently when the safety net is removed.

In the short term, insurers may use standard procedures to manage these risks. For example, they can ensure that the dismissed employees can not return to their offices to send the document for their personal e-mail. In addition, insurers can work for once and layoffs, as opposed to multiple sets, which can undermine productivity and loyalty.

Operational risks posed by licensees or disgruntled employees are symptomatic of substantive issues that require longer-term strategy, however. To begin, greater attention to process automation can help reduce the risk of one or a handful of employees to become too powerful or irreplaceable. Process automation can also reduce cases of fraud. Automating functions of demands - as the first notice of loss or settlement - to minimize fraud is an area of concern for insurers. In the survey of 2008, Datamonitor 200 insurers worldwide, the detection of fraud was the highest ranked reason to invest in the automation of process claims. In addition to reducing the risks of fraud or human error, automating the process reduces operating costs, which has become increasingly important as insurers face a soft market and declining investment income.

Improved data protection is another way to mitigate the risk of malicious data leak by a disgruntled employee. The main objective of a strategy for data protection is to first identify the confidential documents through the use of keywords or file tracking and seconds to ensure that these data remain in the company network. Put restrictions on what data can be moved to a USB drive, burned on CD or sent to a printer, reinforces a strategy of operational risk. Data encryption key provides an additional layer of protection.


Finally, the business intelligence (BI) is evolving to the point where managers in May one day be able to know where the person has what information at what time - and what steps they took to this information. This will increase transparency and reduce the operational risks of employees. Perhaps even more interesting, however, the evolution of BI could lead to a structural change in management philosophy. By understanding how employees use data, companies in May to be able to optimize how each employee is fed information. Although this level of BI May be possible in a few years, the adoption (at least) May be inhibited by concerns about return on investment in the insurer. Vendors have to prove that the employee recalibrating the consumption of information leads to productivity gains over the cost of the solution.

In conclusion, the risk of errors or malicious staff resulting from the layoff should be a warning call for insurers to invest in the prevention of operational risks. By emphasizing the third pillar of business risk, insurers will be able to control costs and harm the reputation of the incidents, and improve operational efficiency.

Jonathan Steiman



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