German Insurance Industry: A Case Study

Subject: Decision Making
Pages: 6
Words: 1653
Reading time:
6 min
Study level: PhD


It could be hardly denied that risk is an inevitable factor for every company operating in nearly every sphere of business. There are numerous interpretations of the concept of risk, which makes it significantly difficult to develop a universal definition of it. However, for this research, three primary characteristics are considered: credit risk, market risk, and operational risk. They are chosen because Lam (2014) identifies these factors to be the most important areas of concern of the implementation of Enterprise Risk Management (ERM). Based on the concept of ERM, this paper will study the case of the German insurance industry, employing the article by Altuntas, Berry-Stölzle, and Hoyt (2011) as a primary source. In addition to investigating the case, the issues related to the current role of data and technology in strategy development will be discussed.

Overview of the Trend

First of all, it is appropriate to briefly overview the current tendencies in ERM implementation since this practice has recently become widespread in various financial institutions (Altuntas et al., 2011). One of the principal advantages of using the ERM approach is that it provides a “holistic view of risk management” in comparison with traditional risk management techniques (Altuntas et al., 2011, p. 414). ERM allows companies and businesses to decrease negative earnings by identifying the correlation between various risk factors across the enterprise rather than investigating them separately. The authors of the article observed that the existing academic literature on the topic, while profoundly theorizing ERM approaches, reveals a considerable gap in the problem of the practical implementation of ERM.

The ERM Model and Survey Design

As it was stated in the introduction, there is no universal definition of the risk concept. A similar tendency is observed regarding the implementation of ERM processes. Altuntas et al. (2011) state that “no agreement on what ERM is and what risk management tools make it occur” (p. 417). Therefore, the authors decide to develop a conceptual ERM framework, which comprises three principal steps: risk identification, risk evaluation, and implementation of appropriate ERM tools (Altuntas et al., 2011). Additionally, the authors distinguish two areas of concern: strategic level and operational level. Based on the developed conceptual framework, the authors conduct a survey, in which 95 companies from the German property-liability insurance sector participated.

Principal Findings on the Strategic Level

Risk Management Strategy

Further, it is essential to discuss the findings of the research on the strategic level. The authors’ purpose is to determine whether the companies under consideration incorporate ERM approaches in their overall business strategies (Altuntas et al., 2011). The study indicates that the number of companies that employ risk management strategies increased from 32 to 89 percent in the period between 2007 and 2009 (Altuntas et al., 2011, p. 419). Therefore, it is possible to state that the awareness about the benefits of ERM is continuously growing. Additionally, the authors mention that efficient risk management strategies emerge on the basis of the company’s risk culture. It is found that the number of companies implementing the policies for facilitating their risk culture increased immensely: from 4 percent in 1999 to 44 percent in 2009 (Altuntas et al., 2011, p. 420). Therefore, one can conclude that ERM has become a widespread approach in the German insurance industry.

Corporate Governance

The authors describe corporate governance as a “mechanism in which stakeholders exercise firm control over corporate insiders and management” in order to defend their interests (Altuntas et al., 2011, p. 420). It is also noted that German corporations have a two-board structure, comprising management and supervisory boards (Altuntas et al., 2011). While the management board directly operates the business, the role of the supervisory board is to control managers, their compliance with the law, and the strategies which are implemented. However, the most common trend among German insurance companies is that the supervisory board does not have enough opportunities to obtain actual strategic information, and thus it cannot assess the risks properly.

Principal Findings on Operational Level

Risk Identification

Furthermore, it is of high importance to observe the operational level results of the survey. The following subsections will provide an overview of the aspects that comprise the structure of the level, according to Altuntas et al. (2011). Firstly, the risk identification process appears to be performed by every participating company on a regular basis, except for one insurer. The three most popular risk identifications methods are the following: checklists (employed by 93.7% of the companies), monitoring of business environment (92.6%), and analysis of legal and regulatory trends (88.4%) (Altuntas et al., 2011, p. 422). Thus, this aspect of ERM is deeply integrated into the majority of the companies.

Risk Evaluation

Accordingly, it is essential to evaluate the identified risks, and thus the researchers asked the participants about their evaluation policies. Altuntas et al. (2011) argue that some hazards are difficult to quantify; therefore, they divide risk evaluation methods into quantitative and qualitative. Among the risks, which are evaluated quantitatively, the authors mention

“investment risk, underwriting risk, and catastrophe claim risk,” while qualitative evaluation is attributed to “operational risk, strategic risk, and reputation risk” (Altuntas et al., 2011, p. 423). Additionally, in accordance with the ERM framework, a company should integrate its single risks into one aggregate risk model, and it is stated that the majority of German insurers employ this method.

Risk Capital Allocation

As is stated by the authors, the allocation of capital is an important tool, which is used in line management to measure the company’s performance (Wynn & Brinkmann, 2016). Also, as Lam (2014) observes, the distribution of economic capital is a highly critical aspect of enterprise risk management. Therefore, this factor was included in the survey, and it could be stated that the majority of insurers allocate their capital to risk categories. Additionally, risk capitals are distributed to departments and regions.

Incentive Contracts

It is evident that there is an apparent contradiction between the interests of managers and shareholders since managers strive to increase their utility while shareholders want them to take particular actions if these actions promise the increase of expected return (Altuntas et al., 2011). Therefore, the researchers included the question about the influence of assumed risk’s effect on the company’s performance. For the majority of the insurers, the impact is ranked considerably high (4-6 on a seven-point Likert scale) (Altuntas et al., 2011, p. 428). Additionally, Altuntas et al. (2011) state that there is an evident link between managerial compensation and performance measure.

Risk Management of Particular Risks

Moreover, three categories of risk are involved in the questionnaire: underwriting, investment, and operational risks. In 87% of the cases, risk limits for underwriting insurance policies exist; however, only 14% of the companies have their limits derived from risk capital budgets (Altuntas et al., 2011, p. 428). Further, it is found that 80 companies employ Asset Liability Management (ALM) process as a part of their portfolio management approach, which extends the company’s presence in the market (Altuntas et al., 2011; Biener, Eling, & Wirfs, 2016). Regarding the operational risk, it is mentioned that the most used methods of reducing operational risks are four eyes, task separation, and transparency principles.

The Organizational Structure of Risk Management

Finally, the authors included the aspect of ERM’s organizational structure in the participated companies (Altuntas et al., 2011). The majority of insurers consider that CEO is responsible for the implementation of risk management tools and processes while some companies charge the department head to take this responsibility (Altuntas et al., 2011). In 2009, only seven companies did not have a central risk management department; however, 41 companies do not have a separate department for risk management (Altuntas et al., 2011). Instead, they attribute these responsibilities as additional for the core duties of an existing department. Thus, it is possible to state that the implementation of ERM is not fully centralized in the German insurance sector.

Current Role of Data and Technologies in Strategy Development

Organizational Environment

It is also important to provide additional information about the German insurance industry regarding the role of data and technologies. Biener et al. (2016) argue that the overall growth of the insurance market in Germany is strongly associated with technical progress. The study by Wynn and Brinkmann (2016) indicates that risk analytics are directly linked to key stakeholders in the insurance industry since the appropriate analysis of internal and external risk data significantly supports decision-making. Also, it is stated that corporate governance, being implemented as a part of the organizational environment, evidently facilitates the efficiency of risk management (Wynn & Brinkmann, 2016). Therefore, it should be observed that the employment of data and technologies in the German insurance market is widespread since it highly benefits profitability and sustainability.

The ART Instrument

Additionally, it should be mentioned that, among various ART instruments, it is possible to choose risk transfer as the most efficient and suitable instrument for the industry under discussion (Lam, 2014). The understanding of this instrument’s necessity is an ongoing trend because the insurance companies realize the potential of this method for handling various risks. For the industry under discussion, it is recommended to implement underwriting risk transfer because there is a considerable demand for this approach in the current market.


This paper studies the case of the German insurance industry in order to understand how enterprise risk management is implemented in various organizations. The authors develop an ERM framework and then perform a survey among the large sample of German insurers. The case is descriptively analyzed, providing insight into the principal findings that contribute to the current knowledge. Also, this paper observed issues related to the major topic, including the employment of data and technology, the correlation between risk analytics and stakeholders, the organizational environment in the context of corporate governance, line and production management. Thus, it is possible to conclude that this case study provides a profound insight into the current state of the German insurance industry.


Altuntas, M., Berry-Stölzle, T. R., & Hoyt, R. E. (2011). Implementation of enterprise risk management: Evidence from the German property-liability insurance industry. The Geneva Papers on Risk and Insurance-Issues and Practice, 36(3), 414-439.

Biener, C., Eling, M., & Wirfs, J. H. (2016). The determinants of efficiency and productivity in the Swiss insurance industry. European Journal of Operational Research, 248(2), 703-714.

Lam, J. (2014). Enterprise risk management: From incentives to controls (2nd ed.). London, England: Wiley.

Wynn, M. G., & Brinkmann, D. (2016). Exploiting Business Intelligence for strategic knowledge management: A German healthcare insurance industry case study. International Journal of Business Intelligence Research, 7(1), 11-24.