Risk Appetite PDF
Preview Risk Appetite
Risk Management Trends for Insurance Companies Jeffrey Lovern Genworth Financial VP, Enterprise Risk Management Global Mortgage Insurance Global Association of Risk Professionals March, 2014 Agenda Global Trends in ERM for the Insurance Industry Basics of Insurance – Simplified P&L and Balance Sheet Own Risk and Solvency Assessment (ORSA) Global Perspective US (NAIC) Guidance Common ERM Elements Across the Globe ERM Frameworks, Risk Appetite, Risk Identification and Assessment Stress Testing Economic Capital 2 | © 2012 Global Association of Risk Professionals. All rights reserved. Basics of Insurance – Simplified P&L Simplified P&L Example Investment Income on Net Earned Premiums Capital Income - Losses Incurred - Expenses Expenses Net Underwriting Gain/Loss + Investment Income Earned Premiums Net Income Losses Incurred 3 | © 2012 Global Association of Risk Professionals. All rights reserved. Insurance Basics – Simplified Balance Sheet Sample Balance Sheet Normal Conditions Cash Surplus Assets Investments Debt Assets Liabilities Future Losses Liabilities Unearned Premium Expecte Regulator Meet Policyholder Obligations d Focus Liabiliti Solvency: Assets > Liabilities es 4 | © 2012 Global Association of Risk Professionals. All rights reserved. Own Risk and Solvency Assessment (ORSA) DEFINITONS PRINCIPLES RISK MINDSET • ... a comprehensive assessment of • ... owned by Senior Management • What are your plans? Forward all the risks a business is exposed to and Board looking view of the business • What are your business risks? • ... a process which links together all the • ... assesses all material risks and Appetite and limits pillars of Solvency II defines risk appetite for a company • What is material? Impact on current capital • ... a report which details and evidences • ... based on adequate the ORSA assessment measurement and assessment • What are you doing about it? processes Responsibility, control and • ... a regulatory requirement mitigation • ... forward-looking (accounts for • Why are you taking that approach? • ... A process of governance and business plans and projections) Evidence and documentation internal control systems • ... ORSA processes and outcomes • What might be the range of • ... Is an integrated ERM system used must be evidenced and outcomes? Stress tests widely and embedded in an documented appropriately • How can you cope with such organisation outcomes? Capital sources ORSA is an Integrated Approach to Enable the Board to Adequately Assess Risks and Capital/Solvency 5 | © 2012 Global Association of Risk Professionals. All rights reserved. Global Perspective of ORSA Region/Country Regulatory Guidance 2012 2013 2014 2015 2016 2017 Bermuda BMA CISSA Implementation -ICAAP Guidelines Malaysia BNM ICAAP -Implementation Australia APRA ICAAP Guidance Implementation -Consultation Singapore MAS ORSA Implementation -Final -Solvency II Europe Solvency II ORSA EIOPA Guidance Pilots Interim ORSA -Implementation? -Consultation Canada OSFI ORSA Guidance Implementation -Final Guidelines -Guidance Manual U.S. NAIC ORSA Second Pilot Implementation -Model Act CIRC Risk-Based China ERM Guidelines First Risk Report Submission Implementation Solvency Framework Japan FSA ORSA No guidance yet ORSA is Here to Stay: 2014 and 2015 Defining Years 6 | © 2012 Global Association of Risk Professionals. All rights reserved. ORSA for US Insurance Companies (NAIC) 1 Description of the Insurer’s Risk Management Framework - Risk Culture and Governance – Governance Structure, Roles, Accountabilities - Risk Identification and Prioritization – How the insurer identifies, categorizes, and manages material risks as it executes its business strategy - Risk Appetite, Tolerances and Limits - Risk Management and Controls – Ongoing ERM activity operating at many levels in the org - Reporting and Communication - Demonstrate that the Risk Framework is Continuous 2 Insurer’s Assessment of Risk Exposure - Assessment of key risks by category (ex. credit, market, liquidity, underwriting, ops risk) - Should consider likelihood and impact that relevant risks have on the firm’s balance sheet, income statement, cash flows 3 Group Assessment of Risk Capital and Prospective Solvency Assessment - Provide an overall determination of risk capital needs for the insurer, based upon the nature, scale and complexity of risk within the group and its risk appetite, and compare that risk capital to available capital to assess capital adequacy - Prospective Solvency and Financial Condition Through Stress (ex. 1/200 yr event) 7 | © 2012 Global Association of Risk Professionals. All rights reserved. Common Elements of ERM Frameworks 1 Board Involvement Risk Appetite Clear Strategy and Objectives Continuous Process of Risk Identification, Assessment, Management and Communication Ownership and Accountability Throughout the Organization (Three Lines of Defense Model) Documentation Prove the System is Working Effectively (Audits, Use Tests) Risk Culture 8 | © 2012 Global Association of Risk Professionals. All rights reserved. 1 ERM Frameworks Organizations May Already Have Solid Risk Management Processes…They Just Need to Better Organize What’s in Place Sample Before State: Separate Desired State: Coordination by Risk Functions and Processes that Manage Across the Enterprise Risk within Their Own Area… Capital Risk Audit k Management s Committees Function iR Modeling and e t a Analytics Capital Compliance R Management Program t s Business e r e Forecasting Modeling and Business t n Understand I Analytics Forecasting :e Commercial the Net l p Strategy Impact to the m Pricing Commercial Enterprise a x Strategy Strategy E Pricing Strategy Product Business Product Management Continuity Management 9 | © 2012 Global Association of Risk Professionals. All rights reserved. Risk Appetite 1 Needs Linkage to Strategy The Perfect Metric May Not Exist Keep it Simple - Start with Basic Principles that Everyone Can Understand Enhance Risk Appetite with Metrics as the ERM Program Matures Use the Risk Identification and Assessment Process to Help Drive Questions on Risk Appetite Having a Risk Taxonomy Helps to Guide Thinking (Initially… but Use Multiple Lenses as the ERM Program Matures) Get Started… and Refine as Needed 10 | © 2012 Global Association of Risk Professionals. All rights reserved.
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