1. ERM should become a natural extension of an insurer’s fundamental risk management practices, with the foundation still rooted in sound traditional controls and policies encompassing the five key categories of risk: credit, market, underwriting, operational and strategic.
2. ERM encompasses three key areas - Culture, Identification and Management, and Measurement.
3. Culture – the establishment of an environment throughout an organization, from the board level to senior management to business line management to the employee, that embeds risk awareness and accountability in daily operations.
4. Identification and Management – the ability to consistently identify key risks across the entire organization, and to establish uniform controls and procedures to effectively manage and mitigate the impact of those risks to the organization.
5. Measurement – the use of sophisticated tools and data collection to quantify risks, including the impact of risk correlations within and among the five categories of risk, considering the impact of general economic conditions, industry-specific events and extreme events, and report these risk assessments to senior management on a regular basis.
RATING PROCESS
1. With the insurance industry overall trending toward a higher risk profile, and the introduction and ongoing development of ERM platforms, the ties that bind risk management and ratings are becoming even stronger.
2. The impact of risk management on an insurer’s rating is based on the insurer’s risk profile and the insurer’s risk management capability relative to that risk profile (made up of both quantitative and qualitative risks).
3. Quantitative and qualitative risks during risk profile evaluation as follows:-
Market Risk
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Judicial Environment
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Credit Risk
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conomic Environment
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Underwriting Risk
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nvestments (quality, type, etc.
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Off-Balance-Sheet Risk
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Liquidity
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Capital Management
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Concentrations
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Line of Business
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Data Quality
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Correlation Among Lines or Risk Categories
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Credit Quality of Reinsurers
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Policy Limits
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Ceded Leverage/Potential Disputes
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Product/Coverage Changes
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Impact of Reinsurance Program
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Legislative/Regulatory Environment
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Management Philosophy
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4, Insurers are expected to demonstrate that their risk management processes are appropriate for their risk profiles.
5. Whenever the insurer’s risk management capabilities are considered insufficient for its risk profile, this could have a negative impact in determining the insurer’s financial strength rating, resulting in a lower rating or requiring additional capital to maintain a certain rating.
ECONOMIC CAPITAL MODEL
1. A strong EC model provides a sound basis for analyzing the risk-adjusted returns (i.e. EC is the denominator) of an insurer.
2. The true value of an EC model is realized only when management employs it in the strategic decision-making process when assessing the impact of different business strategies, asset allocations, reinsurance structures, etc.
3. A strong EC model must be able to capture the material risk associated with each of the major categories of risk and the following characteristics.
Contemplate increased correlations with larger events.
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Show the volatility in results.
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Reflect the benefits of diversification.
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Reflect the dangers of concentrations.
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Reflect the macro economy.
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Reflect the stages of the underwriting cycle.
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Can reflect changing reinsurance environment
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Can accept deterministic scenarios for testing.
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Provide sufficient data to explain extreme events
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Parameters fit company data well.
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Parameters updated/reviewed regularly
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Staff dedicated to the EC model.
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Quality of input data reviewed/audited/tested.
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Can produce volatilities over different time frames
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Model has tested well against historical adverse events
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Produce cash-flow projections for each scenario.
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