Risk Management
Strategies of two Leading Auto-Insurance Companies of USA

Abstract

The aim of this paper is to study
the process of risk management and risk management strategies that are commonly
being practiced globally. To develop a deep understanding of the topic, two
leading insurance companies were taken into account. To analyze the process of
risk management and risk management strategies, comparative analysis was used. Both
of the USA based insurance companies were assessed on the predetermine criteria.
The results of comparative analysis showed that “State Farm” is lacking to
analysis risks appropriately. While, on the other hand, “Liberty Mutual” is
lacking in both risk analysis and risk optimization. It is recommended that all
insurance companies must develop some internal risk management strategy to deal
with emergencies.

Keywords: Risk management, Risk management strategies, comparative
analysis, Emergencies

 

 

 

 

 

 

 

 

 

 

 

“When
we take a risk, we are betting on an outcome that

Will
result from a decision we have made, though we do not know for certain what the
outcome will be.”

                                                                                                                                                                           
           (Peter Bernstein)

Introduction

               There
is no single definition for risk. Generally, it is defined in uncertain
manners. Basically, risk is an uncertainty regarding occurrence of any loss.
For instance, the presence of uncertainty assures the risk of being killed in a
car accident (Glendon, Clarke, and McKenna, 2016).

               Risk
managers are worried about what’s to come. All things considered, it can be
educational and rousing to think back to the past once in a while (Wipplinger,
2007). Things being what they are, what’s the historical backdrop of hazard
administration? One extremely fascinating book about this subject,
“Against the Gods: The Remarkable Story of Risk,” battles that the
genuine partitioning line between what we should call old circumstances and
current circumstances is acing hazard. In this book, Peter L. Bernstein battles
that when individuals started to see how to foresee and oversee dangers, they
likewise started to comprehend that the future did not simply hold irregular
occasions created by the will of the divine beings or the impulses of nature.

History of Risk management

 

               A
few history specialists trust that the most punctual idea of overseeing risks emerged
on account of gaming. A large number of years before Internet people could play
online poker, individuals in various old civilizations played recreations with
dice and bones. Additionally, individuals played diversions that developed into
chess and checkers well more than two thousand years back (Dowd, 1998). The role of insurance in
managing the risk could also be traced back in ancient times. For instance, the
burial societies and programs of mutual aiding have been found in documented
form, which are seemed to be associated with ancient Rome. So the ancient Rome
is considered as the pioneer of modern insurance companies (Froot and
Stein, 1998).

               There
are a huge number of researches that have aimed to discuss the best theoretical
framework for risk management. However, researchers are failed to present any
effective theoretical framework till now. There could be certain reasons for
this for instance, few theories support the data and few do not (Miller, 1992).

               Since
risk management is a vast domain so almost all of the leading insurance
companies establish few risk management strategies. Following are the risk
management strategies of the two leading insurance companies of USA. These two
insurance companies are particularly providing auto-insurance.

1.   
State Farm

State Farm
insurance company is basically an automobile insurance firm, which provides
nationwide services. The policy premiums of State farm are better than all the
rest of the insurance companies and make it out shined. It has the highest
customer satisfaction rating and affordability rating. It provides the services
like, medical payments, personal injury protection, bodily injury liability,
physical damage, property damage, collision and uninsured motorist.
Additionally, emergency road services along travel expenses and car rental
facilities.

2.   
Liberty Mutual   

Liberty
mutual offers a wide range of insurance coverage according to state’s law. It
includes standard coverage (body injury, medical payments, property damage) and
extended coverage (collisions and comprehensive damage).

Literature Review

 

Risk management Strategies

               Every
insurance company has its own risk management strategies to deal with the
jeopardy. Some common risk management strategies are as follow:

Risk Avoidance: The most
easy and common way to deal with the risk is to avoid the risk.

Mitigation of Risk: When
avoidance of risk is impossible than the mitigation is used to manage the
risks. Mitigation is to lessen the negative effects and consequences of any
specific risk.

Transfer of Risk: It is
risk management strategy that allows an organization to transform the risk away
from the firm. For instance, to save your company from financial lose, property
insurance can help.

Acceptance of Risk: It
works on the principle of loosing something in the start will help to get more
in the end. For instance, drug companies spend money in experimenting new drug
but they know that they will get huge revenue once there drug is in the
markets.

Process of Risk Management

The process of risk management involves the following:

·       
Risk identification

·       
Risk analysis

·       
Risk optimization

·       
Risk Control

In first step, evaluation,
monitoring, classification of existing risks and quality management is ensured.
In second step, risks are defines and measured. In third step risk optimization
is performed, it includes risk avoidance and risk transfer. The last step is
risk control, which includes early detecting systems, reporting and control
systems.

Methodology

Research question

What are the strategies used by State Farm and Liberty
Mutual for management of risks.

               To
answer this question a descriptive and comparative analysis will be used and
results will be discussed in following chapter.

               Risk management strategies of State Farm and Liberty
Mutual

Assessment criteria

State
Farm

Liberty
Mutual

Risk identification

Mitigation strategy

Acceptance of risk

Risk analysis

NA

NA

Risk optimization

Acceptance of risk

NA

Risk control

Risk Transfer strategies

Mitigation strategy

 

Discussion

               On the bases of
comparative analysis of the two leading insurance companies of USA, it could be
concluded that there must be a process of risk management under which certain
strategies for the risk management are performed. From car manufacturing plants
to merchants, the industry has encountered extraordinary changes and weights in
all areas lately. For automakers, the emphasize focuses have for all intents
and purposes continued as before: aggressive valuing, item quality, and new
models to liven up the opposition. The producers, who have accomplished these
objectives, indicated amazing development rates over the most recent few years (Lodree Jr.
and Taskin, 2008.).

In any case, the
market situation for auto merchants isn’t the same. Deals had gone around 18% –
20% of every 2008 and 2009. Subsequently, auto merchants were compelled to do
different offerings to help top off the void of diminishing deals – utilized
autos and after deals administration to liven up their business focuses to remain
out of the red. Fascinating to see would be the manner by which organizations
like Clusters and their Newcastle based crush repairs business dealt with
intense financial crisis couple of years prior (Rejda, 
2011).

Recommendations

               The
recuperation of the car division would be reliant on auto loaning. Hazard
administration can be better comprehended by moneylenders in knowing better the
car business’ scene. On the retail level, merchants who are not secured with
disturbed brands like Chryslers and GM and hitching into the new rising brands,
similar to Ford, Hyundai or Volkswagen are believed to perform superior to the
others.   Brand execution shifts each
year, merchants then that offer vehicles from various rising brands are better
prepared to survive any future emergency. Moneylenders and protection
specialists who see a car organization’s procedure of more roads for elective
income – utilized auto deals and after administration support, would in all
likelihood view it as less unsafe than merchants who exclusively focus on spic
and span vehicles.  It was likewise
watched that merchants who have experienced the internet in their showcasing
endeavors, will probably have sensational increments in volume deals when contrasted
with their conventional partners.

References

 

Dowd, K., 1998. Beyond value at risk: the new science of risk
management.

Froot, K.A. and Stein, J.C., 1998. Risk management, capital
budgeting, and capital structure policy for

financial institutions: an integrated
approach. Journal of financial economics, 47(1),
pp.55-82.

Glendon, A.I., Clarke, S. and McKenna, E., 2016. Human
safety and risk management. Crc Press.

Lodree Jr,
E.J. and Taskin, S., 2008. An insurance risk management framework for disaster
relief and

supply chain disruption inventory planning. Journal
of the Operational Research Society, 59(5),

pp.674-684.

Miller, K.D., 1992. A framework for integrated risk
management in international business. Journal of

international business studies, 23(2),
pp.311-331.

Rejda, G.E., 2011. Principles of risk management and
insurance. Pearson Education India.

Wipplinger, E., 2007. Philippe Jorion: Value at Risk-The New
Benchmark for Managing Financial

Risk. Financial Markets and
Portfolio Management, 21(3), p.397.