(January 9, 2014) — More work is needed to help insurers align their risk taking with their overall business strategy, according to data from Towers Watson.
The consultancy found that despite three-quarters of insurers having a risk appetite statement in place, the majority of them feel they are not consistent with their firms’ missions and need developing further.
The clunky, somewhat slow-moving nature of these risk appetite statements was a common complaint.
“Many insurers are concerned that their risk appetite statements don’t synchronize with the daily running of the business,” said Martha Winslow, Towers Watson’s property & casualty enterprise risk management practice leader for the Americas.
“In fact, one chief executive who participated in the survey described his company’s risk appetite statement as ‘high quality, but somewhat sterile’. To some extent, this sentiment stems from development efforts that have been driven by external regulatory compliance requirements.”
Insurers should organise their objectives into four quadrants: achieving targeted performance, preserving capital adequacy, maintaining liquidity, and protecting franchise value, to help rectify the problem, Towers Watson said.
Companies should also consider embracing certain methods for managing risk tolerance and improving the testing of long-term risk resilience, such as introducing the idea of “adaptive buffers”.
These are financial and nonfinancial measures that can assist virtual live monitoring of risk tolerance while covering all mission-critical aspects of the business—capital buffers, reinsurance and hedging, rating agency relationships, employee engagement, and customer affinity programs.
“Linking risk appetite to mission impairment and building in appropriate metrics are essential steps in moving statements from being theoretical to actionable,” said Mark Scanlon, Towers Watson’s life enterprise risk management practice leader for the Americas.
This isn’t the first time insurers have been accused of dragging their feet when it comes to analysing and monitoring their risk appetite: a March 2013 report from Towers Watson on the same issue found that while many had made progress in developing risk appetite as a high-level concept, few had managed to comprehensively roll it out into “business as usual”.
“Without effective implementation and relevant monitoring systems, a risk appetite statement will achieve little beyond a tick in the compliance box,” Ian Farr, global product leader for insurance enterprise risk management, said at the time.
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