Capital
For bank supervisors, the adequacy of capital has always been a cornerstone of their supervision. The same level of intensity has not necessarily applied to insurers given the very different business models between the two sectors, evidenced by liquidity concerns, which have been more heightened in banking traditionally than in insurance.
However, the financial crisis did at least begin to question such paradigms and the increasing merger of insurance supervision into central banks is witnessing a renewed focus on capital and the quality of capital resources. The growing trend from supervisors has been to analyze an insurer or group’s capital sufficiency over a five-to-10-year horizon period, rather than the one in 200-point estimate used for regulatory capital calculations. Supervisors are increasingly examining the actual economic capital needs of the organization and the interplay with commercial imperatives, such as rating agency assessments, and subsequent market reaction and sentiment, rather than relying solely on traditional regulatory capital measures. The introduction of so-called US own risk and solvency assessment requirement from next year is a good example of the substantial change in focus that will occur, notwithstanding the changes that have been made as part of the solvency modernization initiative (SMI) program.
Supervisors are also becoming more willing to intervene in the critical business decisions of regulated entities and insurers could expect similar scrutiny, for example:
- Greater need to demonstrate the sufficiency of the overall capital management planning and governance arrangements in place;
- More detailed analysis concerning stress and scenarios, management actions and the resultant impact on capital and solvency positions on the business and across the group. This includes development of the impact of resolution events;
- Greater expectations on Board and senior management to understand more intimately capital flows and related investment decisions, particularly concerning non-traditional, non-insurance activities; and
- Some regulators are even introducing more preclearance requirements, whereby they provide a ‘no objection’ position on issues such as the setting and release of dividends.
Risk governance and culture
The global financial crisis highlighted the weaknesses of many insurers’ risk governance and risk management frameworks. Insurance supervisors cited a number of shortcomings, notably:
- It was not clear who, within the insurer, had responsibility for risk management;
- The risk-management function was often under-resourced and/or poorly qualified to perform the role;
- Often one individual had multiple roles, such as the chief risk officer, the chief financial officer and the approved actuary for managing risk and making decisions;
- Poor board oversight and direction with an over-reliance on senior management and actuaries
- A risk culture was not embedded within the organization;
- Risk-appetite statements and tolerances were not clearly articulated or linked to business strategy and performance;
- Key performance indicators of individual’s were not linked to the performance of risk management;
- There were deficiencies in risk monitoring, reporting and controls; and
- A culture of compliance existed toward risk management generally.
To address these issues, supervisors have increasingly reached the conclusion establishing a strong risk culture is an essential element of good risk governance and that if they are to ‘stay ahead of the curve’ in undertaking their roles, than a reassessment of how they oversee risk management is required.
To be continued