Conclusion
Consequently, supervisors have begun to set new risk-management expectations for insurers, for example:
Establishing more risk-sensitive capital regimes to better strengthen and link risk-management to the capital needs arising;
Introducing stress and scenario requirements, including resolution, or strengthening such requirements where these already exist;
Expecting remuneration policies for senior executive personnel that encourage behavior that supports the risk-management framework and long-term financial interests of the firm;
Requiring a clearly articulated risk appetite statement which is clearly embedded within the insurer’s operations; and
Demanding better assessments regarding the suitability and adequacy of the insurer’s risk-management framework, including ongoing appraisal of the insurer’s risk culture.
It is important that supervisors are now increasingly examining the behaviors and not the structures that exist and are firmly of the view that high-quality risk management requires effective risk governance. This is particularly evidenced by the standards and expectations set by the board that invariably has a significant impact on the culture and the management of the insurer. Very often, it is these elements that determine the quality of risk governance.
However, few organizations have successfully changed risk culture holistically, and for the insurance sector, changing culture remains a key challenge because too often they employ established program techniques that often fail to capture the right measures. For example:
They are anxious for outputs and deliverables that drive activity but not real meaning;
Activities are too focused on the short-term and are profit rather than risk-oriented;
Collect lots of information but mainly information that is an expression of what people are happy to say, not what they actually believe and do;
Focus more on mechanisms (e.g., reward structures) than behavior and beliefs;
Are too broad in their focus (i.e., even defining culture can be time consuming); and
Are internally focused and do not explore the experiences of external groups (customers, regulators, former members of staff).
A good risk culture is, therefore, necessary to guide and limit individual and group behavior and an insurer’s risk culture is best understood by evaluating the appropriateness, adequacy and effectiveness of its risk-management practices. In essence, a culture of risk ownership is one where there is:
A well-executed risk-management strategy;
Leaders that role model good risk and compliance behavior;
Performance management and reward systems that drive and reinforce compliance;
A risk function that is aligned and engaged with the business; and
All members of staff understand accountabilities and consequences.
The implications for insurers are twofold. First, they need to establish structured MI and interventions that can build the foundation elements of a good risk culture. Second, they then need to employ transformational activities that create a strong risk culture in accordance with the organization’s ambition.
More macro-surveillance activities
One of the lessons learned from the financial crisis was the need for supervisors to undertake more macro surveillance and analysis concerning the state of the industry with regards to aggregate solvency and capital levels, and in particular, entity-specific cash flow generation and balance sheet structures.
As a result, supervisors are using more data requests outside the usual quarterly or annual return cycle to seek information such as pricing approaches and methodologies used by insurers, asset model valuations parameters and inputs, sufficiency of control and governance arrangements over reserving calculations and extent of third-party vendor and outsourcing activities. The introduction of prudent person principles, such as in Solvency II, will also likely incur for insurers greater supervisory attention.
The greater focus on macroeconomic issues is now changing how supervisors interact with the industry. For example:
Using “forward-looking” information to augment their usual “point-in-time” data analysis;
Introducing new system-wide metrics and requirements (such as those planned for G-SII’s) to ascertain potential buildup of risks;
More frequent and extensive interaction with Boards;
The need for supervisors to have a variety of reference points when assessing the financial condition and capital position of insurers; and
The introduction of early warning indicators to assist in determining the robustness and sufficiency of insurer’s internal model output.
Collectively, these initiatives will result in supervisors adopting a much more judgment-based style of supervision going forward, with the confidence and preparedness to intervene proactively particularly in matters concerning capital, risk and governance.
In our view, practical actions for insurers are:
Undertake appropriate horizon analysis to ensure your existing risk-assessment methodology is capable of identifying potential new risks and understand how this could impact upon your strategic objectives;
Ensure that you have the capability to properly integrate your risk appetite metrics, risk-management strategy and overall strategic business objectives;
Have multiple risk and capital tools that can assist you undertake better analysis of the dynamic risk environment in which you operate;
Begin to integrate conduct risk considerations into your so-called ORSA/FLAOR (own risk and solvency assessment/forward looking assessment of own risk) assessment to ascertain the impact on the business plan, pricing and reserving;
Instill the right risk-governance behaviors across the organization to enhance your risk-culture; and
Be well-prepared and able to identify the emerging trends in insurance supervision to better understand how your risk management framework can respond.
The article is taken from KPMG’s publication, entitled “Evolving Insurance Regulation: The Kaleidoscope of Change—March 2014.”
R.G. Manabat & Co., a Philippine partnership and a member-firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.