1. Risk management is the process by which companies systematically identify, measure
and manage the various types of risk inherent within their operations.
2 Important to note that the objective of risk management is not to eliminate
risk and volatility, but to understand it and manage it.
3. Below are the key risk management trends in the insurance industry and describes how risk management impacts the overall rating process and the development of capital requirements.
ENTERPRISE RISK MANAGEMENT AND RISK MANAGEMENT FRAMEWORK
1. Establishing a risk-aware culture, using sophisticated tools to consistently identify and manage, as well as measure risk and risk correlations – is an increasingly important component of an insurer’s risk management framework.
2. ERM represents the development of an enterprise wide view of risk through which insurers consistently can identify, quantify and manage risk on a more holistic basis.
RISK MANAGEMENT AND RATINGS
1. The assignment of a rating is usually derived from an in-depth evaluation of a company’s balance sheet strength, operating performance and business profile as compared with company's quantitative and qualitative standards.
2. An insurer should develop and constantly refine an ERM framework, including the development of internal economic capital modeling to remain competitive in today’s dynamic environment, build sustainable earnings and capital accumulation, and ultimately, maintain high ratings.
3. An insurer that can demonstrate strong risk-management practices integrated into its core operating processes, and effectively execute its business plan, will maintain favorable ratings in an increasingly dynamic operating environment.
3. An insurer that can demonstrate strong risk-management practices integrated into its core operating processes, and effectively execute its business plan, will maintain favorable ratings in an increasingly dynamic operating environment.
CATASTROPHE RISK MANAGEMENT
1. catastrophic loss, both natural and man-made, could be the No. 1 threat to the financial strength and policyholder security of property and casualty insurer because of the significant, rapid and unexpected impact that can occur.
2. Particularly in the rapid escalation in insured exposures over the past decade – reflecting demographics and rising property values, combined with the increased frequency and severity of natural disasters.
3. Most property and casualty insurers have utilized increasingly sophisticated catastrophe modeling tools, primarily those provided by specialized firms with extensive meteorological, seismological, statistical and technical resources.
3. Most property and casualty insurers have utilized increasingly sophisticated catastrophe modeling tools, primarily those provided by specialized firms with extensive meteorological, seismological, statistical and technical resources.
4. During the rating evaluation process of an insurer, all these areas are assessed and considered along with the financial flexibility of a company to determine its ability to first, avoid a material loss to capital, and second, respond to any significant capital deterioration from such an event.
DYNAMIC HEDGING
2. As the baby boom generation nears retirement, the opportunities for future growth in this business segment are enormous for companies.
3. The insurance industry offering annuities and other products and services within the retirement savings market has risks including interest rate risk, asset/liability management and disintermediation risk.
4. The emergence of secondary guarantees within the variable product market and the introduction of equity-indexed products, new risks are emerging and will significantly influence the long-term financial strength of retirement savings providers. However, there benefit features are subject to two major risk categories.
4. The emergence of secondary guarantees within the variable product market and the introduction of equity-indexed products, new risks are emerging and will significantly influence the long-term financial strength of retirement savings providers. However, there benefit features are subject to two major risk categories.
5. Policyholder-based risks, which represent the exposure to adverse development based on the optionality in various product designs where the policyholder can control different elements of the product. As a result, many of the actions a policyholder can take can profoundly change the risk dynamics of the product.
6. Capital-market-based risks, which are derived from the fact that the insurance company is guaranteeing certain returns on the assets invested. These guarantees put some of the investment risk, which variable annuities previously had passed on to the policyholder, back onto the insurance company’s balance sheet.
7. Sophisticated risk management through hedging has become a critical factor for success in the variable annuity market with the widespread consumer acceptance of new living benefits. These hedging programs use derivative instruments and are designed to mitigate the negative impact of swings in the equity markets.
