The value added to stakeholders from the implementation of risk management driven through regulation

Abstract

This research aims to determine the value added to stakeholders from the implementation of risk management driven through regulation. An initiative to introduce risk management regulations to insurance companies in South Africa started in 2009. The cost of implementing risk management is material and therefore, value must be derived to justify the costs. However, literature shows that regulation may not always be effective at achieving its intended purpose and may result in unintended consequences. The financial results of South African insurance companies before and after the implementation of risk management were compared. Statistical testing showed that there was no significant change to the financial results, even though significant costs have been incurred. It seems that risk management may have been implemented as a symbolic gesture to meet the requirements of the Regulator, but was not necessarily seen to be adding value. The inappropriate implementation of risk management may have unintended negative consequences from the high costs incurred, to employees and management in terms of job security and compensation; to investors in terms of the attractiveness of the insurance industry; to customers in terms of higher premiums; and to the Regulator in terms of reduced sustainability and stability of the industry.