Strategic Business Risk Insurance · PDF fileStrategic risks 7% All risk categories 72% Page 4 Top 10 risks for the insurance industry Strategic risk: ... Information technology

May 22, 2008 Association des actuairesPage 1

Strategic Business RiskInsurance 2008Jim Doherty

Association des actuaires

Top 10 risks for the insurance industryPage 2

Investors want to know about risks and risk management

“By declaring the risks, and quantifying them somehow, they give investors confidence in the company.”

“The company has to show in detail how it operates its current risk management. It has to show it has a clear knowledge of the difference between business risk and financial risk.”

“Demonstrating how the risk approach adds value; showing the benefits of protection through risk management.”

“They can show what systems they have for risk management.”



Yet there is a strategic risk management gap

Note: Multiple responses were possible

► 72% of respondents focus on all four areas of risk in their assessment

► 28% of respondents do not focus on all risk categories

► Strategic risk is the least focused on

Source: Ernst & Young, 2007 from Compliance to Competitive Edge

An enterprise risk assessment does not always go beyond financial reporting

Q: What is the focus of the risk assessment?

Focus of risk assessment

Separate risk categories 28%

► Operational/business risks 22%

► Financial/financial reporting risks 20%

► Compliance risks 14%

► Strategic risks 7%

All risk categories 72%


Strategic risk: destroyer of value

► If strategic growth is a significant driver of value in companies, understanding strategic risk is of high importance

► Review of large share price drops suggests that strategic risk can be a dangerously quick and permanent destroyer of corporate value (Ramse Consulting)

► But strategic risk has been neglected in recent years, with resources prioritised on financial and compliance risk and less focus in enterprise risk assessments



EY Research ReportStrategic Business Risk – Insurance 2008


EY Research ReportRisk Identification

►Macroeconomics

► International trade

► Finance

► International security

► Information technology

► Law

► Environmental issues

► Business regulation

► Social trends

► Research science

► Energy

► Business strategy

►We worked with Oxford Analytica to interview more than 70 analysts

►These included specialists in over 20 subjects with crucial impacts on business performance

►Interviews were open-ended

►Analysts were asked to ► list, rate and comment on the 10 most

significant trends or uncertainties that may impact companies

► list the five most significant strategic business risks to firms within their industries

Subject Matter Experts



EY Research ReportRisk Prioritisation

►Panels of sector experts, including journalists, researchers, advisors and Ernst & Young Practice professionals rated the severity of the sector risks using a numerical rating

►Analysts were asked to rate►The loss impact►The competitive impact

►The risks that were rated as having the greatest impact across the largest number of sectors were identified as the ‘top business risks for global business’

► Banking and capital markets

► Technology

► Insurance

► Consumer products

►Oil & Gas

► Asset management

► Automotive

►Media and entertainment

► Telecommunications

► Utilities

► Pharmaceuticals

► Real estate

► Biotechnology

Industry


Top 10 risks for the insurance industry

1. Climate change2. Demographic shifts in core markets 3. Catastrophic events4. Emerging markets5. Regulatory intervention6. Channel distribution7. Integration of technology with operations and strategy8. Securities markets9. Legal risk10. Geopolitical or macroeconomic shocks



The Ernst & Young strategic business risk radar

►Our risk radar is a simple device to present a snapshot of the top 10 strategic business risks for a company, a sector or indeed the global economy as a whole

►Not all strategic business risks are the same in nature, therefore we have divided the radar

►macro threats that emerge from the general geopolitical and macro environment in which we all operate;

► sector threats that emerge from trends or certainties that are re-shaping the specific industry;

► operational threats that have become so intense that they may impact the strategic performance of leading firms


Risk radar: Top 10 risks as macro, sector or operational threats



1. Climate change

► A long-term risk with broad-reaching implications

► Can affect pricing structures, reserving policies, solvency► Can lead to broader, more gradual consequences

including:► Mortality and health problems► Spread of environmentally-related litigation► Political risk linked to conflicts for control of resources or

inadequate response by governments


2. Demographic shifts in core markets

► Creates new demands that insurers are well-placed to satisfy

► New products for changing financial, and retirement, needs (the pay-out phase)

► Key challenge will be to maintain market share in core markets in the face of competition from other sectors



3. Catastrophic events

► Rising costs increase potential impact on insurers’ earnings and capital

► Significant challenges include:► Capital – available / required► Pricing ► Contract structure► Financing


4. Emerging markets

► Both a risk and an opportunity► success is not guaranteed

► Competitive threats could see today’s leading global players displaced

► Many companies’ growth strategies are essentially emerging market strategies, but challenges abound



5. Regulatory intervention

► New regulatory developments and increased scrutiny

► Could result in changes in operations and underwriting practices

► Politically-driven intervention could enhance risk► Compliance costs, primarily driven by government policy,

can be unpredictable


6. Channel distribution

► Technology can change how insurance services are sold

► Traditional agent based distribution models are under pressure from technologies that allow companies to reach clients directly

► Competitive advantage goes to companies with multi-channel access for sales and information



7. Integration of technology withoperations and strategy

► Technology must be seen as an enabler to keep up with the competition

► Technology has:► Opened new distribution channels► Allowed more sophisticated and accurate underwriting► Reduced unit policy processing costs

► Related risks include the threat of cyber-terrorism and over-dependence on outsourcing partners


8. Securities markets

► Pressure from securities markets needs to be closely monitored

► New players are entering the market► Financial innovation has seen: ► Blended products challenge the position of traditional insurance

companies ► New sources of capital investing in insurance start-ups



9. Legal risk

► Legal uncertainties could threaten a company’s standing or result in financial loss

► Three main areas of liability law: ► Environmental► “Managerial”► Undeveloped


10. Geopolitical or macroeconomic shocks

► Global Economic Threats► Financial melt down from derivatives and hedge funds► Fuel prices► Terrorist activity



Potentially above the radar… …within 5 years

1. Over-reliance on model-based risk management2. Threats to the reputation of the industry3. Losing the war for talent4. Increasing corporate exposure to global regulatory heterogeneity5. Possible emergence of entirely new risks


Are you protected? Are you missing out on opportunities?

► How does your company identify, assess, manage and monitor strategic risk?► How do you exploit strategic risk as a point of competitive advantage?► Who assures the strategic initiative portfolio from selection through to benefits

delivery?► What is your equivalent of the Strategic Risk radar?► How do you keep it refreshed?► How does it warn you of impending danger?► What infrastructure exists to assure controls are in place over strategic

business risks?



Possible management action

► Conduct an annual risk assessment that defines key risks and weights probability and impact on business drivers

► Extend the risk assessment beyond financial and regulatory risk to consider the wider environment in which your organisation operates and the full extent of its operations

► Conduct scenario planning for the major risks that you identify and develop a number of operational responses

► Evaluate your organisation’s ability to manage the risk that you identify► in particular ensure that your risk management processes are linked to the risks that

your business actually faces► Ensure you have effective monitoring and controls processes that can give

you both earlier warning and improved ability to respond► Keep an open mind about where risks can come from.

► We live in an increasingly interdependent global economy and risks that can damage your business can initiate in markets and sectors a long way from your own


Questions & Answers


“It is never the risk

that causes damage or creates opportunity –

it is the response.”

Thank youStrategic business risk

Association des actuaires

Documents

Strategic Business Risk Insurance · PDF fileStrategic risks 7% All risk categories 72% Page 4 Top 10 risks for the insurance industry Strategic risk: ... Information technology