Pillar 2 for Insurer s:

Transcription

1 Pillar 2 for Insurer s: Greater requirements, enhanced value? September 2018

2 Order of events Presenters: 1. Pillar 2 in context 2. Redefining the standard for Enterprise Risk Management Michael van Vuuren Partner, Actuarial & Insurance Risk Management, KPMG Hong Kong 3. Unlocking value 4. Q & A Elliott Simpson Manager, Risk Consulting, KPMG Hong Kong 2

3 Pillar 2 in context 3

4 Objectives of Risk Based Capital in Hong Kong Following the global trend towards adoption of a risk-based approach to insurance supervision, the Insurance Authority (IA) has set the following objectives for the RBC regime in Hong Kong: 1 To ensure that Hong Kong s regulatory regime is aligned with international standards and fit for purpose 2 To foster a strong risk culture and prudent risk management practices throughout the industry 3 To promote the financial stability of the industry and the protection of policy holders Capital will be better allocated to the risks being run by an insurer 4

5 Structure of the proposed RBC regime The IA is proposing a three pillar structure for RBC in Hong Kong: Pillar 2: today s focus Source: Insurance Authority 5

6 Timeline of Pillar 2 in HKRBC Based upon the latest HKIA notices, the introduction of Pillar 2 RBC in Hong Kong is expected to proceed as per the following key dates: June 2017 Guideline 10 implementation (with additional aspects on 1 Jan 2018) Today End of 2018 Expected deadline for the IA to finalise the ERM Guideline 1 st January 2020 Effective implementation of the ERM Guideline 8 th May 2018 Draft Pillar 2 Guideline on ERM released by the IA 6 th July 2018 Deadline to respond to the draft ERM Guideline 30 th April 2021 Insurers to submit their first ORSA report to the IA 6

7 Redefining the standard for Enterprise Risk Management 7

8 IA s objectives for industry The two main goals of the ERM guideline is to provide guidance for insurers to: Enhance the ERM process Establish ORSA Objectives of ERM - Risk culture - Holistic approach towards ERM - Nature, scale and complexity considerations - Principle-based and flexibility reflecting insurer-specific circumstances - Comply-or-explain supervisory approach Insurer feedback is vital to the process. 8

9 Core components of the ERM framework Group Supervision ERM review process Forwardlooking analysis Stress & scenario testing Economic capital ORSA report Model & data Capital & solvency assessm ent Review and feedback Risk strategy & appetite ERM Framework Risk measurement, management and reporting Organisat ion & Policy Recovery plan Risk appetite statement & framework ERM governance Risk policies Risk assessment & controls Risk management actions 9

10 Risk appetite statement Risk Appetite Statement Tolerances & Limits Monitoring & Escalations Board Solvency Capital Ratio Condition Action Monitoring Frequency Escalation Level Insurers are expected to have a risk appetite framework in place already for GL10 compliance. >300% Over-capitalised Redeploy capital / Rerisking to take on more risks Quarterly Board 220%-300% Sub-optimal level Fine-tuning strategy Quarterly Senior Management 150%-220% Comfort N/A Quarterly N/A 125%-150% Sub-optimal level Improve efficiency of capital use Monthly Board 100%-125% Alert Restore capital position Monthly Board <100% Remediation Execute recovery plan for financial position restoration N/A Board 10

11 Risk governance Board Risk Committee Insurers are expected to have the risk governance structure in place already for GL10 compliance. Senior Management Risk Management Function 11

12 Risk policies and procedures ERM Policies Insurance Investment Reinsurance Conduct Cyber Data quality Internal control Insurers are expected to have some of the risk policies in place already for GL10 compliance. The list on this slide is for illustrative purpose only. Insurers should set up the risk policies and procedures proportionate to the nature, scale and complexity of their business operations. 12

13 Risk assessment and controls Risk Identification Risk Quantification Risk Monitoring & Reporting Risk Management Actions Risk taxonomy Risk register Quantitative Qualitative Management info ORSA report Assessment Approval Review and feedback loop 13

14 Own Risk and Solvency Assessment The ORSA report must be useful for management. Considerations Timing Audience Resources Ownership Proportionality Minimum Requirements 14

15 Economic capital What is economic capital? How is it different from regulatory capital? Insurers are generally expected to develop an internal economic capital measure or model based on its own specific circumstances. Source: IA May 2018 consultation How do you build an economic capital model? What do you do with an economic capital model? Should you align to RBC? 15

16 Own Risk and Solvency Assessment Considerations Timing Audience Resources Ownership Proportionality Minimum Requirements 16

17 Solvency Percentage Forward looking analysis & Stress and scenario testing Insurers are required to report the results of stress and scenario testing in the ORSA Report. Solvency Requirement Base Solvency Internal Solvency Threshold 100% Solvency Requirement Based on the nature, scale and complexity of the business operations, an authorised insurer should give consideration to conduct regular forward-looking continuity analysis. An authorised insurer should conduct stress and scenario testing based on material risks to assess its risk profile and thus the relative movements in capital resources and capital requirements based on assumed adverse movements in key risk factors. Source: IA May 2018 consultation Stressed Solvency Year 0 Year 5 Year 3 17

18 Own Risk and Solvency Assessment Considerations Timing Audience Resources Ownership Proportionality Minimum Requirements 18

19 Group supervision Tier 1 Tier 1 Group-wide ERM requirements; Group and solo ORSA; Group prescribed capital requirements. Tier 2 Tier 2 Tier 3 Group level view of the sub-group; Substance over form; Sub-group level ORSA for HK or extract of Group ORSA. Solo Tier 3 Solo ORSA with consideration of group risk. Solo Solo ORSA. 19

20 Unlocking value? 20

21 Industry challenges ORSA report timing Group supervision and tiering Review and validation requirement Timeline Economic Capital & Forward looking analysis Board and senior management training Proportionality Source: KPMG roundtable discussion 21

22 Risk management is evolving Leading insurers have identified that risk can be value enhancing for organisations through reduced costs, lower volatility and identifying revenue opportunities through risk insights. Risk 3.0 Risk is value creating Risk 1.0 Risk 2.0 Risk is integrated Risks brought together for an integrated view Alignment of risk management activities with strategy and business model Use of risk management outputs in decision making Focus on risk quantification and modelling Clarity of accountability and purpose across all 3 Lines Integrated and automated RMS components efficient operating costs and leveraged value Full integration with business strategy a true advisor to the business Forward looking and proactive in assessing or exploiting risk Dynamic risk reporting and decision making capabilities Developed use of data analytics and technology for risk management Risk is treated as compliance Misaligned risk and business strategy Risk managed in silos with limited and inconsistent enterprise wide risk management Limited use or input in key decision-making Limited skills and organisational capability 22

23 We all like formulas! Example risk framework component Contribution to various KPIs Increased return Enabling risk function to add value Simplify functions Automate processes Accelerate decision making Extract value Key Performance Indicators (KPIs) Cost savings from risk mitigation Effective risk mitigation should result in reduced expected loss by the business. Risk adjusted returns Revenue enhancements from risk insights Cost of risk (operation) Efficient data management and analytics on risks should provide additional risk insights to further optimise business operation (ie investment strategy, product development). Fixed and variable operational cost for improving risk management framework and process would reduce expected return but could be offset by other benefits. Positive contribution to KPIs Embedded value / VONB Accounting Profit Reduced cost of risk capital Additional earning from capital no longer required to support risk. Reduced cost of risk capital (ie due to better S&P ratings) would help to increase return. Solvency regulatory and economic To add value beyond loss prevention risk management must make a positive contribution to the risk adjusted return on capital (RAROC) 23

24 Closing remarks Tight timeline with lots to implement Be proportionate Focus on the business - it s strategy and risks ERM and ORSA are not just a regulatory paperwork process Engage with your Board and senior management Adding value requires a foundation in place Get started! 24

25 Q & A 25

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