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2006 Geneva Association/International Insurance Society Research Presentation, Chicago

Enterprise Risk Management in the Insurance Industry

Madhusudan AcharyyaUniversity of Southampton

United KingdomCentre For Risk Research

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Agenda Research methodology and data

Results (under five dimensions) of the research

• Understanding of ERM

• Motivation of ERM

• Design of ERM

• Challenges of ERM

• Performance of ERM

Contribution of the research and policy implication issues

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Understanding of ERM ERM as an concept

• To manage all risks holistically and bringing a balance in all risk and management initiatives

• Focus on risk and its categories• Focus on the organisation

ERM as a process

• Focus on Risk • Identification and Planning• Modelling and Measurement• Implementation• Monitoring

• Focus on the organisation• Harmonisation • Standardization• Integration• Centralization

Focus on the organisation

Focus on risk

ERM as a concept

ERM as a process

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Understanding of ERM (Cont’d)

Insurance Risk

Management

Financial Risk

Management

Audit Risk

Management

Business Continuity

Management

Insurance Risk

Management

Financial Risk

Management

Operational Risk

Management

Core Business

Risk Management

Strategic Risk

Management

Enterprise Risk

Management

Focus is more on the downside risk and to survive from unpleasant surprises (either pre or post situation)

Focus is more on to increase the efficiency and growth of the organization (in terms of profitability and value adding)

Focus is more on capturing opportunities in the face of risk whilst protecting downside (both pre and post loss situation)

Protection the reputation (corporate image/brand) and achieving social recognition

Specific

General

Economic responsibilities

Legal responsibilities

Ethical responsibilities

Discretionary responsibilities

Bottom Level

Top Level

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Motivation of ERM

Leadership of CEO

• Market pressure

• Size of the organisation

Regulations

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Design of ERM

Shareholder Value Model• Economic Capital

Risk Governance Model• Controlling

Risk Reporting Model• Transparency

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Shareholder Value Model

Large Risks

(Including

emerging

risks)

Filter

Risk Landscape

Rader

Screen2

Modelling Risks

1. Major Risks - Statistical Models - Threat Scenario 2. Dependencies - Normal Situation - Stress Situations

New Correlatio

ns

Economic

Capital

Culture

Financial Strength

Market Environme

nt

Expertise

Regulatory

FrameworkPast

Experience

CustomerReturn Target

Total Acceptable

Risk

Rader Scree

n3

Economic Balance Sheet

Shareholder Value Model

Risk Governance Model

Risk Reporting Model

Equity RiskMarket Risk

InsuranceRisks

Risk Transfer (or Finance)

Reinsurance Securitisation (ILS,

Swap)

Geographically Diversified

Portfolio

99% 99.5%

Rating Agency

Regulators

EV

99% VaR

99% TVaR

All Risks

(Whatever the type

and source)

Financial Market, Insurance, Credit, and

Operational

Filter

Quantifiable & Unquantifiable

Quantifiable

Rader

Screen 1

Risk Appetite

Shareholders

Market Consistent Value of in-force liabilities [Y]

Market Value of Assets [X]

Available Capital [X-Y]

Probability distribution of P&L

Structure of ERM

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Risk Governance ModelGroup Board

Group CEO

Group Management Board

Local Management Boards

Country/Regional CEOs

Division /Business Units CROs

Country/Regional Risk Managers

Local Risk Committees

Heads of Divisions/Business Units

1st Line of Defence [Management]Setting strategy, performance measurement, establishment and

maintenance of internal control and risk management in the business

Group Risk Committee

Group CRO

Market & CreditInvestment RiskInsurance Risk

Operational RiskStrategic Risk

Business Continuity

CFO, CUOChief Actuary

etc

Other Committees

Group Audit & Compliance Committee

Group Chief Auditor

Country/Regional Internal Auditors

2nd Line of Defence [Risk Assessment]Formal Risk Management Framework

3rd Line of Defence [Independent Assurance]

Providing independent and objective assurance of the effectiveness of Group’s

risk management systems and internal control developed and implemented by1st

and 2nd lines of defences

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Challenges of ERM

Operational Challenges• Risk Landscape (or Profile)

• Risk Communication and Culture

• A Common Risk Language

• Lack of Trust

Technical Challenges• Risk Modelling and Measurement

• Correlations and Diversification Benefits

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Performance of ERM

Tangible and Intangible Benefits• Shareholder Value

• Stakeholder Satisfaction

• Reputation

Ex-ante and Ex-post• R&D

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Contributions and Policy Implication Issues Understanding of ERM

• Who and Whom

Motivation of ERM• Role of Organisation versus other Stakeholders (regulators, rating agencies, professional

institutions/firms)

Design of ERM• Several Standards of ERM

Challenges of ERM• A unique risk and capital model in broader sense

Performance of ERM• Big pictures

• Value creation for stakeholders

Theory of ERM• A set of theories [multidisciplinary]

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Conclusion

Research Methodology

Results

Contributions