Linkage Between Risk Strategy, Appetite, Tolerances, and Limits 2016 ERM Seminar for the P&C ...

47 Pages·2016·0.32 MB·English

Linkage Between Risk Strategy, Appetite, Tolerances, and Limits
2016 ERM Seminar for the P&C Actuary
Speakers:
Jason Abril (also Moderator)
Kevin Madigan
October 7, 2016
© 2016 Willis Towers Watson. All rights reserved.
Linking Strategy to ERM
A more detailed discussion of linking strategy to ERM was contained in
another session (Aligning ERM, Risk Models and Business Strategy) on
Thursday, October 6.
Here we want to specifically address linking strategy to one component
of ERM: Risk Appetite.
We will illustrate how this linkage allows for the development of
tolerances and limits that help insurers obtain real value from their ERM
framework.
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Benefits of ERM
Traditional Risk Management -
Insurers already have extensive risk
management practices.
Enterprise Risk Management can add
three things to the existing risk
management:
 Transparency – everyone will be able to
see what is being done and not done for
risk mitigation and control of the key risks
 Discipline – an expectation that the
planned risk management will actually take
Alignment
place continually and that all key risks will
be managed
 Alignment – Risk management can be
aligned with company strategy
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Defining risk in the context of an insurer
Risk is an insurer failing to deliver on its mission
Purpose Responsibilities Mission Time Horizon
 Delivering value to  Good security and  Contracts make long-
shareholders service to policyholders term promises
 Fulfilling the social  Rewarding careers for  Business, investment
purpose of insurance employees and insurance cycles
 Responsible conduct for
regulators
Mission success depends on creating value
 Developing and maintaining a comparative advantage
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Examples of ERM linkage to Strategy & Plans
Risk Appetite &
Risk Profile
Tolerance
Diversification / Risk Reward
Concentration Optimization
Risk Adjusted Risk Capital
Pricing Base
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DEFINING RISK APPETITE
Elements of the risk appetite framework
Risk Appetite
Risk Strategy
Strategic expression of overall philosophy towards risk-trading necessary to achieve the
mission, so that from the Board on down there is alignment
What risks to take? How much risk to take?
Risk Tolerances
Risk Preferences
Quantitative expression of the amount of
Articulating risk as opportunity, identifying
aggregate risk the organization will tolerate
risks that need to be taken deliberately in
over varying time horizons as a means to
the expectation of creating value, needed
achieve its mission
to achieve the mission
Risk Attractiveness
Risk Limits
Tactical assessment of the risks within the
Granular operational controls on specific
preference set, reflecting current
risks; expressed in metrics that are locally
circumstances
relevant and practical to monitor
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What ERM typically brings into the planning process
Results from a recent, limited, Willis Towers Watson survey
One of the ways that Strategy and ERM
Importance to the Strategic
alignment happens is through the risk
Planning Process
related information that ERM brings to the
100%
planning process. Most common:
97%
90%
80%
 Rating agency & regulatory capital – long
70% 76% 74% a part of planning discussions, ERM can
60% help linking these values to risk decisions
50%  Changes to the risk environment – plans
40% could be adjusted either up or down in
30% favorable or unfavorable risk environments
20%  Risk profile – a look at the distribution of
current risks leads to a discussion of
10%
whether plans will further concentrate risk
0%
Rating Agency Changes to Risk Profile or whether they will lead to increased
/ Regulatory risk
diversification and the implications of that
Capital environment
on growth, profitability and risk.
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There are a wide variety of risk related strategic objectives
Results from a recent, limited, Willis Towers Watson survey
Preservation of Capital  Every company said that preservation of
capital was very important or important.
and almost all agreed on the importance of
rating agency view of capital.

There were seven other risk related
Important
26% strategic objectives that were important to
a third or more companies
Very 
In all, we found over 20 different
Important
74% combinations – reflecting a high degree of
diversity of opinion on what is important for
ERM.

One size ERM will not fit all!!
Managing Managing Risk taking
Return for
peak through the within Between 1/3 and 2/3 of
risk taking
exposures cycle tolerance
companies said these items
were important or very
Rating Reduction of
Regulatory
agency view losses important
view of ERM
of ERM experienced
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Defining an enterprise’s risk appetite is a strong foundation upon
which to build broader risk management activities
 While many insurers have developed risk appetite statements, there
remains strong dissatisfaction with the value of the statements in
making business decisions
 Risk appetite should begin by stating the linkage to an organization’s
business strategy, yet many statements miss this link
 The link to business strategy leads to an enhanced approach to
understanding the company’s willingness to accept the adverse
consequences of uncertainty, i.e. risk
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GLOBAL ERM SURVEY
There has been incremental progress with risk appetite but further
work is planned
 Does your organization have the following risk appetite components in place and are
there further developments planned?
A framework for demonstrating consistency between top-down risk appetite and…9% 40% 32% 19%
Processes for external communication of risk exposures against risk appetite 13% 34% 23% 30%
Processes for internal monitoring and reporting of risk exposure against risk appetite 16% 62% 19% 3%
A control framework for managing operational risks on a day-to-day basis 19% 53% 17% 11%
Risk policies and procedures to support risk appetite 26% 53% 15% 6%
Documented risk appetite/tolerance statement(s) 27% 57% 13%3%
Risk limits governing day-to-day risk taking for life insurance risks** 29% 54% 11% 6%
Risk limits governing day-to-day risk taking for non-life (non-catastrophic) insurance… 31% 51% 12% 6%
Risk limits governing day-to-day risk taking for market risks 35% 53% 8%4%
Risk limits governing day-to-day risk taking for credit risks 37% 50% 9%4%
Risk limits governing day-to-day risk taking for non-life catastrophic insurance risks* 37% 45% 10% 8%
In place but no plans to develop further (outside of BAU)
In place and plan to develop further (outside of BAU)
Not in place but plan to develop
Source: 2014 Towers Watson Global ERM Survey.
Base: North American insurers (percentages exclude non-respondents)
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