Enterprise Risk Management: time to shift gear

in Financial Services, 27.06.2017

Chief Risk Officers of (re)insurance companies are presented with a long awaited opportunity to reposition the profile of their function and create value for customers, shareholders and the public at large but their departments need to evolve rapidly to cope with the challenges this entails.

Up until not many years ago, most (re)insurance companies were struggling with the idea of building a centralized organizational unit in charge of establishing, promoting and monitoring the enterprise wide risk management system.

After all, if risks are managed by the exact same people who take them, what’s the purpose of a dedicated Risk Management function other than fulfilling a regulatory requirement?

Demystifying risk management

Such skepticism was due to a limited understanding of a few concepts, e.g.:

  • risks need to be measured to ensure they do not exceed the overall capacity of the company, this is particularly important when long tail liabilities and financial markets’ volatility come into play
  • risks vary significantly in terms of reward and capital requirements, therefore risk selection and prioritisation criteria are key to meeting business objectives
  • risks are interconnected and may influence each other, no adequate response can be designed without understanding the full picture
  • appropriate performance metrics and incentive systems are preconditions to “healthy” risk taking
  • building generous capital buffers is not sufficient as some risk types are impossible to quantify and require a highly specialized analysis of root causes and appropriate mitigating measures

Just to make things worse, most Risk Management functions have been established as a spin-off of existing functions or shortly before/after other control functions (e.g. Compliance) without investing sufficient time in the clarification of respective accountabilities, alignment of agendas and coordination of processes and resources, thus generating confusion at Board and executive management level.

Over time, with different paces and levels of maturity, learning from errors and thanks to a more consistent and better understood set of regulations across geographies (Solvency 2 being a game changer in this respect), all (re)insurance companies have been moving away from the naive notion of risk management existing in the aftermath of the 2008 financial crisis.

Seizing the opportunity

Whereas, on one hand, this presents all CROs a long awaited opportunity to reposition the profile of their function and create value for customers, shareholders and the public at large, on the other hand, Risk departments need to evolve rapidly to deliver on their mission.

In fact, if earning the “seat at the table” was difficult, meeting all the expectations this entails is going to be way more demanding.

Successful Risk Management functions will show a clear understanding of the challenges their business is coping with and won’t hesitate to step outside their comfort zone to augment quality and impact of their contribution.

Whilst questioning the status quo may be uneasy, the end result is worth the effort: superior business outcomes and a more fulfilling career for all risk professionals.

 

Key challenges

Enterprise Risk Management: success enablers

Drive disciplined risk taking
Ensuring product development, pricing and underwriting decisions reflect risk capacity and appetite
  • Meaningful and actionable definition of the risk strategy, including risk preferences, risk appetite and risk tolerance translated into enforceable operating limits
  • Appropriate use of risk measures to steer key business critical decisions, e.g. strategic asset allocation, underwriting/risk transfer strategy, M&A, major IT and business transformation initiatives
  • Risk adjusted performance indicators underpinning objectives setting and performance reviews

 

Improve customer experience
Delivering on customer promise from product sale to claims payment
  • Clear understanding of pain points along the customer journey by leveraging internal data sources (e.g. complaints, fines, breaches) to drive process improvements and inform discussions with distributors
  • Tone at the top translated into robust controls around sales and claims handling practices to position the company as a customer service leader

 

Achieve more with less
Optimizing use of resources and talent
  • Efficient implementation of the 3 lines of defence concept, clarification of respective roles, elimination of functional silos and automation of routine tasks
  • Control functions positioned as business partners, with clear focus on value add activities and constructive challenge, able to attract/retains talents and act as incubator for future leaders

 

Turn data into insights
Gaining a competitive edge through a superior understanding of risks and opportunities
  • Effective governance of data and calculation models underpinning business critical decisions (e.g. reserving, pricing, capital management)
  • Transparent and complete Management Information on risk levels, including forward looking indicators and projections to highlight risks and opportunities along the planning cycle
  • Adequately trained decision makers (e.g. regulatory requirements, risk management tools)

 

Build resilience
Protecting business operations and balance sheet from unexpected shocks
  • Strong solvency and liquidity positions sufficient to withstand severe stress scenarios
  • Effective Own Risk and Self Assessment (ORSA) process
  • Proactive response to cyber threats
  • Robust governance of key third parties

 

Create long term shareholder value
Safeguarding reputation, increasing return on capital and reducing volatility of profits
  • Strong internal control system fostering trust among external stakeholders (e.g. investors, business partners, regulator)
  • Optimized allocation of capital to operating units/lines of business with most attractive risk adjusted returns
  • Stabilisation of business operating profits and dividend pay-out through risk transfer and hedging instruments
  • Increased RoE due to improved modelling of capital requirements and recognition of diversification benefits
  • Risk based long term compensation system for key risk takers to promote sustainable value creation

 

(click here to download the table)

 

 

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