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Financial Risk in Insurance Industry

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Table of contents

  1. Background
  2. Problem Statement
  3. Research Question
    Research Importance
    Research Objectives
    Research Limitations
  4. Risks and Its Types


In recent years, risk management has become a priority for all sectors of the economy, so organizations can protect their interests while achieving their goals. Through risk management, stakeholders can ensure that the organization will achieve the desired results, reduce the impact of threats to acceptable levels, and increase opportunities to seize opportunities. Uncertainty can be defined as the inability to know what will happen in the future. Increased uncertainty increases risk, and vice versa, uncertainty, and risk are directly proportional to the importance of the other party.

The benefit comes from the existence of risk. If there is an opportunity for loss (risk), there is also an opportunity for profit. Facts about the risks faced by the organization. The types of risks can be divided into operational risks and professional risks, business risks, political risks, risks related to human resources, technical risks, health risks, risks to related parties, and competition risks. The organization’s mitigation strategies and measures include administrative, technical, contractual, and security procedures within the scope of business activities.

At present, it is not appropriate to manage risks at the level of a functional elevator alone. The current market environment requires a more integrated approach to risk management. All organizations around the world are taking a global approach to all the risks they face. Integrated risk management is an ongoing process in which potential risks are assessed at all levels of the organization and all results are collected at the business level to improve decision-making. Integrated risk management must be part of the organization’s strategy and have a significant impact on risk management within the organization. This approach helps organizations maximize their benefits at the next level. The integrated approach focuses only on identifying and assessing risks and mitigating impacts to minimize acceptable risks. Take risks at an acceptable level and help organizations drive innovation within hermitages.

Jordan’s insurance market currently consists of 24 insurance companies. One is registered as a life insurance company, 9 is a non-profit company and 14 is a comprehensive company. In 2016, Jordan’s total written premiums were 582.9 million JD and the total paid was 438.9 million JD. In the same year, the sector previously achieved a net income of 35.1, a return on assets of 3.8%, and a return on capital of 10.2%. Jordan’s insurance industry faces many challenges that require our attention. It is, therefore, crucial to find solutions to these challenges. These challenges include the numerous insurance companies related to market size, low per capita income, and poor credit quality of insurance companies. In addition, the insurance industry has been affected by the global financial crisis and local political issues. Despite these challenges, the relative importance of Jordan’s insurance industry during this period 2000-2016 increased, with total premiums increasing at an annualized rate of 12% and premiums during this period. Insurance increased by 187% from 21 JD to 59 JD. In addition, the relationship between total premiums and GDP (insurance penetration) increased from 2000 (1.7%) to 2016 (2.1%).

One of the main goals of insurance companies is to build customer loyalty. Organizations can save a lot of money by satisfying customers because they are five times cheaper than attracting new customers. If insurance companies do not consider good strategies to maintain market share, they will face risks. Therefore, effective risk management is essential for all companies. The importance of the insurance industry depends on several factors. The insurance industry provides security and protection by collecting huge premiums that can be invested in the local economy, preventing sudden losses, generating financial resources, and generating funds to stimulate growth. The insurance industry encourages investment to reduce losses and increase trade and commerce. Insurance plays an important role in sustainable economic development.

Finally, risk management is a system that works proactively by examining the various risks that may arise and defining procedures and measures that increase the organization’s ability to avoid or mitigate the impact of risk processes. At an acceptable level, risk management is the process by which an organization can define risks and evaluate and develop strategies for managing or maintaining those risks. This process begins by asking three simple questions:

  • What can go wrong or right?
  • What can be done to avoid making mistakes and enjoying the good?
  • What will happen if an error occurs?

Problem Statement

Insurance companies are in the core business of managing risk. The companies manage the risks of both their clients and their own risks. This requires an integration of risk management into the companies’ systems, processes, and culture. Various stakeholders pressure their organizations to effectively manage their risks and to transparently report their performance across such risk management initiatives. Banks argues that some risks can and should be retained as part of the core business operations and actively managed to create value for stakeholders, while others should be transferred elsewhere, as long as it is cost-effective to do so.

According to Stulz, some risks present opportunities through which the firm can acquire comparative advantage, and hence enable it to improve on financial performance. Generally, a review of the literature on risk management seems to suggest that better risk management practices result in the improved financial performance of the firm. By linking risk management and performance, insurance firms can more effectively and efficiently understand the value of implementing a risk management framework. The higher risk maturity is associated with improved stock performance for most firms. Ernst & Young also reinforces this point of view by suggesting that companies with more mature risk management practices outperform their peers financially, and tend to generate the highest growth in revenue. A number of studies have been conducted on risk management by companies in Jordan but little has been studied on Insurance companies.

There is some risk management practices have a greater significance on financial performance than others, that is, the existence of a risk management policy and the integration of risk management in the setting of organizational objectives were considered to be the key risk management practices that had a direct effect on financial performance. There is no doubt that we can predict the types of risks that insurance companies may face for all sizes and activities, but what we can learn is how to take advantage of these disorders to ensure the integrity and efficiency of existing or future insurance companies.

Risks faced by insurance companies have many types which are listed with a brief description:

  1. Insurance Risk: It is underwriting, the risk associated with the uncertainty of business written in the future
  2. Market Risk:- It is the risk associated with movements in interest rates, forcing exchange rates or asset prices to lead to an adverse movement in asset values
  3. Credit Risk: If another party fails to perform them in time i.e. if the party fails to pay the credit. So, allowance should be made for the financial effect of non-payment of reinsurance and of the non-payment of premium debtors.
  4. Liquidity Risk: It is the risk that a firm has insufficient financial resources to meet its obligation as they fall due or can only secure the resources at excessive cost.
  5. Operational Risk: It in the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems or from External events. These types where adopted from the literature review.

Research Question

The purpose of this exploratory study is to determine the current status of risk management in the Jordanian insurance industry and to improve risk management practices. This can be achieved by answering the following questions:

  1. What are the current risk management practices of Jordanian insurance companies?
  2. How can Jordanian insurance companies properly improve and institutionalize risk management processes?

Research Importance

The importance of the study lies in the following main considerations:

  1. Provide practical evidence of the importance of compatibility between priorities competitive and insurance companies’ risks with its reflection in Institutional performance.
  2. Identify insurance companies’ risks that affect the performance of the companies in Jordan and study the impact of each of them.
  3. Most studies have been conducted on companies operating in Europe and the United States. So the importance of the study lies in what will add to the concepts and frameworks of science to fill a gap.

Research Objectives

The following objectives will be achieved:

  1. Research on current risk management practices of Palestinian insurance companies.
  2. Identify the main risks of Palestinian insurance companies.
  3. Recognize risk management and its importance.

Research Limitations

  1. There are lots of studies on the field but few of them are implemented in Jordan.
  2. Some of the risks under study are out of control and could not be forecasted easily; which makes a huge limitation and gap in this study.
  3. Time limitations.

Risks and Its Types

Risk is defined as an adverse or negative event that has the potential to adversely affect your organization. According to Mazouni decision-making is risk in itself, and it can be measured by examining several factors such as risk, event, and risk. He noted that the main factors were the severity and frequency of the incident.

Fundamental and economic risks affect many people, such as earthquakes and unemployment. However, special risks represent risks that affect a specific group of people, such as theft or vandalism. Not all basic risks are insured by the insurer because if the insurer insures for the basic risk, the insurer will suffer significant losses. Some of them (such as storms and injuries) are insured. However, almost all private risks are guaranteed by insurance companies.

Insurance companies try to reduce financial losses by reducing convergence in some areas and relying on reinsurance. SCOR states that reinsurance means that insurers insure large insurance companies to compensate for possible financial losses. During this period, the government guarantees certain basic risks, such as unemployment. Insurance companies cannot guarantee many of these risks. Because the government is capable of doing so, it cannot control them. Basic risk and special risk can be divided into pure risk or estimated risk.

Fundamental risks affect not only people but also the organization. For example, a set of risks affecting an organization is called business risk. In addition, speculative risks affect organizations. These risks can be divided into strategic, operational, and financial risks. Strategic risk is related to the purpose of the organization, and the vision, and mission of the organization. Therefore, if an organization changes its business equipment, policies, or procedures to increase the effectiveness and efficiency of the organization, thereby increasing profits, it can lead to higher loss rates.

Operational risk comes from daily work within the organization. For example, employee injury or data corruption due to poor security or poor backup strategies. This affects the organization’s ability to continue to provide products and services. Financial risk comes from the turbulence of financial markets, because financial risk may cause financial institutions to suffer losses. Speculative risk is the main risk facing any organization, and organizations are actively trying to reduce this risk. Many people are interested in hiring and hiring departments to manage project risks.

The most important risk facing the insurance industry is financial risk, which can be divided into five categories. The first is market risk; it focuses on asset deterioration due to changes in major market factors. Second, credit risk is the inability of a company to pay its debts. Third, the Basel Committee defines operational risk as ‘the risk of loss due to improper or defective internal operations, personnel, systems or events’. Fourth, liquidity risk is caused by a lack of cash flow, which prevents companies from complying with their short-term debt. Fifth, improper application of existing laws or changes in laws such as tax laws will create legal and regulatory risks.

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Financial Risk in Insurance Industry. (2022, August 30). GradesFixer. Retrieved March 29, 2023, from
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