Risk Management

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• Risk Management -
• A Reinsurers Perspective
• Andy Sharpe

Institute of Actuaries Life Convention 9-11
November 2003
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Agenda

• 1. Risk Management - what are the drivers?
• 2. Enterprise Risk Management Framework
• 3. Whose risk is it anyway?
• 4. Risk Management - project or day job?

Institute of Actuaries Life Convention 9-11
November 2003
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Changing Risk Management Force A
Makeover Coming Soon..
Institute of Actuaries Life Convention 9-11
November 2003
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Drive Towards Risk Management (1)
Institute of Actuaries Life Convention 9-11
November 2003
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The Drive Towards Risk Management (2)
Is risk management a leadership or followership
culture?
Institute of Actuaries Life Convention 9-11
November 2003
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What does risk management focus deliver?

• Formalisation of existing processes?
• Clarity of responsibilities?
• Recognition of operational shortcomings?
• Recognition of exposures?
• Comfort for Senior Management?
• Comfort for Regulators?
• Is risk management an alternative for capital?

Institute of Actuaries Life Convention 9-11
November 2003
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The role of the reinsurer in Risk Management

• Traditional Role
• insurance risk protection
• capacity
• advice - underwriting claims
• Financial reinsurance
• Role of the reinsurer is widening...

Institute of Actuaries Life Convention 9-11
November 2003
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LH Enterprise Risk Profile
LH Risk Profile
Operational Risk
Investment Risk
Reputational Risk
Group Risk
Credit Risk
Insurance Risk
Asset Allocation
Stock Selection
External
Internal
Processes People Systems
Life
Health
Liquidity Risk Market Risk
Disability Critical Illness Medex LTC
Life Insurance
Longevity
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Role of Risk Management Framework

• Clarity of risk identification
• Recognition of inherent risk
• Risk interfaces
• Role of business processes in controlling risk
• Leads to
• Assessment of control effectiveness
• Systematic process of managing risks
• Changing mindset/culture

Institute of Actuaries Life Convention 9-11
November 2003
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Business Processes

• Sales
• Underwriting
• Administration
• Finance
• Complaints
• Claims

Institute of Actuaries Life Convention 9-11
November 2003
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Business Processescont

• All act as filters/controls for risk
• All contain significant operational risk
• Poor operational risk control manifests itself
  elsewhere
• Ultimately shows through within experience and
  results

Institute of Actuaries Life Convention 9-11
November 2003
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Insurance/Reinsurance Business Processes
Reinsurer
Insurance Co
Treaty
Policyholder

• Underwriting
• Claims
• Administration
• Accounts
• Money Laundering checks
• Valuation

• Sales Process
• Initial admin / commission generation
• Policyholder servicing/ complaints etc.
• Compliance

• Large cases - u/w claims
• Additional admin / accounts

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Reinsurer - Risk Management Review

• Review of own systems controls
• Pricing
• Underwriting
• Admin etc
• Recognition for own performance improvement
• Recognition of the reliance on others outside of
  own company to perform risk management role

Institute of Actuaries Life Convention 9-11
November 2003
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Risk Profile - Quota Share Arrangement (OT)
ERMF
Insurance
Credit
Investment
Operational Risk
Group Risk
Reputation
Whole Transaction
?
?
?
Post Treaty
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Insurance Risk (1)

• Originally primary justification for reinsurance
  proposal
• Rely on reinsurers expertise to establish
  anticipated experience
• Transfer significant experience risk to reinsurer
• But,
• Primary office retains significant control over
  acceptance and tolerance of insurance risk
• Underwriting limits
• Claims limits

Institute of Actuaries Life Convention 9-11
November 2003
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Insurance Risk (2)

• Limited direct control of key risk transfer
  element of treaty
• Underwriting audits
• Claims audits
• Administration audits
• High quota share - perhaps see 5 of cases yet
  receive premiums, pay claims etc..
• Whose interests are the direct company staff
  responsible for?

Institute of Actuaries Life Convention 9-11
November 2003
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Credit Risk

• Consider a level premium (life) policy
• OT reinsurance
• Up front commission/rebate approach
• Where is the credit risk in the arrangement?
• Relative to lapse rates - credit risk exists
  because ceding company may not reimburse original
  commission
• Reinsurer unable to pay claims? - probably only
  an issue for a shrinking/closed account
• Question Do the credit risk requirements of
  CP143 afford appropriate protection?

Institute of Actuaries Life Convention 9-11
November 2003
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Investment Risk

• Depends upon structuring of the reinsurance
  arrangement
• Internally, investment risk will be based upon
  ALM policy and execution of investment strategy

Institute of Actuaries Life Convention 9-11
November 2003
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Operational Risk

• Both insurer and reinsurer have own Operational
  Risks
• Definition of appetite and tolerance is difficult
• not as tangible as the previous risks
• likely to be defined as low tolerance
• probably actually defined by exception (sharp
  intake of breath)
• Generally, operational risk will not be reinsured
  under the treaty
• Modern treaties now include warranties, data
  requirements
• reinforce treaty requirement via audit and review

Institute of Actuaries Life Convention 9-11
November 2003
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Reputational Risk

• Reinsurer continues to follow sound business
  practices
• Pays claims, maintains capital position etc.
• Reputational risk management from the
  Governance etc of the Company

Institute of Actuaries Life Convention 9-11
November 2003
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Reputational Risk (Other)

• Stance taken on risks/issues
• Influence on market etc
• High dependency on ability to control other
  risks..
• Insurance risk appetite can be more clearly
  defined where reinsurer has comfort around claims
  volatility
• comfort on underwriting/claims process
• reliability of experience data - able to monitor
  business and price competitively
• able to reserve appropriately !!

Institute of Actuaries Life Convention 9-11
November 2003
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Questions...

• Where does risk actually sit within the
  reinsurance model and who controls it?
• How is the value chain of reinsurance actually
  changing?
• What is the role of the reinsurance treaty?
• Whose risk is it anyway?

Institute of Actuaries Life Convention 9-11
November 2003
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Who Is The Real Risk Manager?
Institute of Actuaries Life Convention 9-11
November 2003
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Role of Risk Management

• Centralist role unlikely to be successful
• Operational specialists know their own
  limitations
• Operational specialists facilitate
  improvement/change
• Risk Management
• recognise the right processes
• get them working
• facilitate change
• Internal Audit
• ensure processes working properly

Institute of Actuaries Life Convention 9-11
November 2003
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Risk Management - Project or day Job?
Enterprise Risk Landscape
Risk Identification Risk Categorization
Risk Recognition
Strategy
Business Plan

• Controls
• Group Controls
• Local Controls

• KPIs/KRIs
• Performance
• Outlook

Control Effectiveness
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• Risk Management -
• A Reinsurers Perspective
• Andy Sharpe

Institute of Actuaries Life Convention 9-11
November 2003