The global financial crisis highlighted the weaknesses of many insurers’ risk governance and risk management frameworks. As many insurance supervisors merge with existing central bank functions, the approach to insurance regulation is likely to take on some bank centric methodology.
“Regulators will be increasingly involved in monitoring the decisions of the Board of directors and how well these align with the risk appetite and risk culture of the company; some may not be prepared for the intense scrutiny this will involve.”
Based on recent moves by bank supervisors to alter their roles and focus, it would seem fair to assume that the merging of insurance supervision with central bank functions will result in a greater emphasis being placed on understanding the business and operating model of the supervised firm.
Of particular interest for supervisors is the ability of the insurers to withstand future stresses on its capital position, and what impact this may have for the insurer’s long-term capital requirements and viability as a going concern.
This increased scrutiny will likely require insurers to better demonstrate the impact of business decisions on overall risk-adjusted profitability, and the ability of the entity and group to meet forward solvency and liquidity needs, including the reinsurance program selected.
One area that will clearly draw the attention of supervisors will be the forward-looking assessment of own risk (FLAOR) which has replaced the Own Risk and Solvency Assessment (ORSA) terminology.
The FLAOR is designed to be an assessment of a firm’s previous, current and future risk, strategy and capital position. Not surprisingly, many firms are finding it difficult to project their future risk profile over the life of the business plan; an area in which regulators, ratings agencies and the market are increasingly looking to gain comfort.
In a further sign of the changing regulatory landscape, many supervisors are now moving to a formal quarterly reporting process to allow for the regular capture of decisions using ORSA/FLAOR risk and capital data. They are also starting to expect greater quantification of conduct risk analysis to be included in the ORSA/FLAOR, particularly in regards to how such risks interrelate with the insurer’s business plan, pricing and reserving.
Supervisors have also increasingly reached the conclusion that establishing a strong risk culture is an essential element of good risk governance and that if they are to ‘stay ahead of the curve’ in undertaking their roles, than a reassessment of how they oversee risk management is required.
Consequently, supervisors have begun to set new risk management expectations for insurers, such as:
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