???????? Life Insurance Risk Management

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????????Life Insurance Risk Management

• ???? ???????
• S.N. Low

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Insurance Density Average premium per
person Insurance Penetration
Premium/GDP Source Swiss Re, Sigma No. 5 /
2006
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Life Insurance in Taiwan

• Total Life Ins Co. 22 (local) 9 (foreign) 31
• 2005
• Total in-house staff (Life 24,839 in 2005)
• Total agency (Life 202,737 in 2005)
• Total asset in industry Life Ins NT 6,574b
• Total policies Basic 44,243,445 Rider
  70,874,777
• Total Life Ins premium NT 1,457,632m
• Total claims NT 498,827m
• National Income per Capita NT 438,255
• NT spending per person in life insurance NT
  64,015

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Life insurance - beyond commercial activities

• Institutional investors Source of fund for
  private/public sectors
• Government/Treasury Bond NT1,631,285m _at_ Aug06
• Insurance Industry holds 20 of total outstanding
  Govt Bonds
• Foreign Investment NT 2,022,944m _at_ Aug06
• Insurance Industry holding 2.5 of total market
  capitalization
• Financial protection against premature death or
  health problems
• Savings vehicles for planned/unplanned events and
  retirement
• Contribution to social stability
• Promote and support community services and
  welfare
• Promote better employer/employee relationship
• Created more job opportunities
• Relieve social welfare systems

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Why is Life Insurance Unique?

• Lifetime commitment
• Unilateral - Utmost good faith
• Aleatory contract (????)
• Contracts of adhesion (????)
• Fiduciary role

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Keys to lifetime commitment

• Governance
• Risk Management
• Professionalism

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Leading to ERM as defined

• a process, effected by an entity's board of
  directors, management and other personnel,
  applied in strategy setting and across the
  enterprise, designed to identify potential events
  that may affect the entity, and manage risks to
  be within its risk appetite, to provide
  reasonable assurance regarding the achievement of
  entity objectives.
• Source COSO Enterprise Risk Management
  Integrated Framework. 2004. COSO.

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ERM - objectives

• Aligning risk appetite and strategy
• Enhancing risk response decisions
• Reducing operational surprises and losses
• Identifying and managing multiple and
  cross-enterprise risks
• Seizing opportunities
• Improving deployment of capital
• Reference ERM Integrated Framework. COSO

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Risk management process
Reference Applying COSOs Enterprise Risk
Management Integrated Framework, The
Institute of Internal Auditors
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Major risk exposures

• Operational risk
• Business process risk
• Technology risk
• Data integrity
• Legal/compliance risk
• Human resources risk
• Assets destruction, disappearance and misuse
• Merger and acquisition risk

• Marketplace risk
• Market and product strategy
• Reputation risk
• Regulatory risk
• Tax risk
• Rating agency risk
• Financial Risk
• Capital management
• ALM
• Pricing
• Liquidity

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Risk management tools

• Self-assessment and controls
• (e.g. Audit, claim management, agency
  disciplinary committee)
• Process descriptions
• (e.g. Operation manual, company policy,
  Sarbanes-Oxley, ISO)
• Key risk indicators and reports
• (e.g. Efficiency report, regular management
  reports, IT exception reports)
• Specialized techniques, process and organization

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• Financial risk
• as illustration

• Capital management
• ALM (e.g. interest, forex)
• Pricing (e.g. assumption vs experience)
• Liquidity (e.g. cash flow)

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Risk Assessment/Mitigation Impact vs.
Probability
High


I M P A C T
Share/ Transfer
Mitigate/ Avoid
Accept
Control
Low
High
PROBABILITY
Reference Applying COSOs Enterprise Risk
Management Integrated Framework, The
Institute of Internal Auditors
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Risk Assessment/Mitigation
High


Medium Risk
High Risk
Share/Transfer
Mitigate/ Avoid

• Anti-selection
• Risky investment activities

I M P A C T

• Catastrophic loss
• Jumbo case
• Currency mismatch

Low Risk
Medium Risk
Accept
Control

• Fraud
• Irrational competition

• Assumptions deviations
• Expense overrun
• Entry error

High
Low
PROBABILITY
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Financial scorecard/ risk dashboard

• Financial analysis
• Capital adequacy level
• Revenue growth
• Earnings growth
• ROE

• Variance analysis
• Investment performance
• Expense ratio
• Claim ratio
• Persistency
• Reinsurance profile
• Actuarial analysis
• Cash flow testing
• Asset Liability Management

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Examples on performance benchmark

• Minimum level of capital
• Regulatory RBC
• Capital to obtain given rating from rating agency
• Capital to cover operation risk and business
  growth
• Acceptable cash flow
• Cash flow testing assuming extremely negative
  situation stress testing
• Acceptable growth/pattern of profit and ROE

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Do we have the structure?
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Summary

• Importance of life insurance
• Uniqueness of life insurance
• Major risks exposures
• Mitigation measures
• Most importantly
• Continuous growth through providing value-added
  products and services
• Sustainable long term financial strength to
  deliver lifetime commitment

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References

• Overview of risk management, Casualty Actuarial
  Society
• Enterprise Risk Management in the Life Insurance
  Industry, LOMA
• Enterprise-wide Risk Management for the Insurance
  Industry Global Study, PricewaterhouseCoopers,
  2004
• ERM Integrated Framework. COSO
• Applying COSOs Enterprise Risk Management
  Integrated Framework, The Institute of Internal
  Auditors
• Creating value through ERM A practical approach
  for the insurance industry, Tillinghast-Pwers
  Perrin
• AEGON Risk Management, SOA Risk Management
  Taskforce

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Thank you