Chartis: Risk Management for Insurance – Doing More with Less in a Turbulent World
Posted: 9 March 2017 | Source: Chartis
Against a backdrop of low interest rates, volatile markets and depressed returns, insurers are struggling to find healthier yields, and this hostile marketplace is driving them toward higher-risk assets.
But despite a challenging and unpredictable environment, many insurance firms neglect their risk management. Rather than providing a forward-looking, risk-enabled view of their operations, most insurance firms focus on delivering tick-box reporting for Solvency II, or its local equivalents. In fairness, many have only just finished implementing their new risk systems, and are exhausted from the effort and cost required.
The markets aren’t getting any easier to navigate, though, and regulations such as IFRS 4 and IFRS 17 are on the horizon. Insurers must use this brief period of respite to work out how to repurpose or future-proof their current risk management systems to cope. The business benefit of risk management cannot be understated: in the turbulent waters of the current unpredictable macroeconomic climate, enterprise risk management (ERM) can allow firms to simulate and stress-test the effects of business decisions, modeling their balance sheets to steer themselves more effectively through the storm.
That said, as most firms have now implemented systems to address the requirements of regulations such as Solvency II, we expect the rate of growth in risk IT expenditure in the insurance sector to flatten over the next few years. Firms will be expected to do more with less.
As strategic, top-down risk management becomes ever more necessary – and valuable – an important component of this new approach will be the Chief Risk Officer (CRO). In some insurance companies, the CRO has taken on a more complex, strategic role within the business, commanding an ever-widening remit, with responsibility for mapping risks such as operational risk (OpRisk) into capital models.
But there is a growing disparity between what insurers increasingly want from their risk management systems, and what vendors are supplying. No vendor currently offers an integrated end- to-end ERM solution, focussing instead on hedge analytics, asset management, regulatory reporting and/or OpRisk, but there is a slow and steady convergence of these capabilities.
Different insurance models, geographies and regulation – past and present – will all influence how vendors develop their risk management solutions. In the meantime, insurers may be able to develop the ERM systems they desire by using the increasing influence and expertise of CROs, who can orchestrate successful ERM to create the right solution for their organizations.
Ultimately, to maximize the value generated by ERM, insurers should pay as much attention to the way they implement it as to the decision to implement it in the first place, selecting what’s right for them from the myriad options available. By adopting a fully integrated ERM program, aligned with their strategy and embedded into all levels of the firm, insurers can capitalise on the real value of ERM, while vendors continue to move slowly – but purposefully – to an all-encompassing ERM solution.
For an executive summary of Chartis’s report Risk Management Systems for the Insurance Industry: Market Update 2017, visit www.chartis-research.com.