ERM and the new world of insurance regulation Where insurers should focus now to find business value
Enterprise risk management is a common denominator Reform efforts have much in common, including enhanced group-level prudential regulations for higher capital reserves, mandatory stress testing, tougher supervision, enhanced risk management Recovery and resolution plans may also be international policies will take several years urgency of their actions in preparation capital reserves: waiting until regulations as jumping ahead of regulation could prove In the areas of risk governance and management, however, where the regulatory direction and business need are clearer, immediate-term action makes writing comments on proposals will prove advantageous in engaging in the debate Why do insurers need to focus on risk governance and risk management now? One reason is that it is the focus of appear to believe that failures in these areas were the underlying cause of the supervisory changes were designed to shore up insurers risk governance and risk What should insurers aim for in their ERM frameworks? As illustrated in Figure 2, effective frameworks will outline the governance and daily activities that will provide management and the board of directors with timely, comprehensive and accurate information to make more informed decisions, ultimately helping to protect insurers, their stakeholders and their customers from future threats of Governance and oversight Board and executive committees and communication Planning and decision-making alignment Executive summary Risk appetite Capital planning Risk included in management decision-making If there is any certainty in the global insurance industry, it s that the regulatory landscape is undergoing and will After focusing their attention on a regulatory overhaul for the banking sector, governments and regulatory authorities around the world are now turning their New regulations and guidelines are still taking shape internationally and domestically, and, in some cases, their However, it is clear that they will be complex and multidimensional, with insurers have delayed preparation while the see approach is potentially dangerous, as the new regulations will present a and some of the general outlines are The near-term focus for insurers must be on strengthening enterprise risk management (ERM) and compliance governance frameworks, which are common threads across all regulatory ERM, as has been clearly demonstrated proactively embraced change and gone approach to compliance in the face of This paper provides an overview of the impacts of the coming regulatory Further, it outlines the business case for boosting risk management and governance programs, while suggesting an approach for insurers to follow starting now to prepare for the next learned from the rollout of the Own Risk by the National Association of Insurance Commissioners (NAIC), which provided an impetus and useful guidance to many insurers in building a stronger ERM template for insurers as they seek to comply with, state, federal or even international regulations, which, though differing in the details, are all likely to is identi cation and assessment Risk taxonomy Inherent and residual risk Emerging risks Accurate and comprehensive Clear and useful Credit Data governance and quality Risk management culture Insurance risk Market risk Risk measurement Capital modeling Internal and external loss data Risk reporting Normal and stressed conditions Data, technology and infrastructure Timely data availability Integrated architecture Policies, training and culture Point-in-time and ongoing risk management training Liquidity Operational Compliance Risk monitoring Ongoing monitoring Risk responses Issue tracking and resolution Appropriate distribution Automation Reporting engines and analytics GRC tools Policies and procedures Reputational 2 ERM and the new world of insurance regulation ERM and the new world of insurance regulation 3
What CROs say Respondents to EY s recent survey uniquely positioned to assess both the opportunities and challenges of compliance because they often lead broad frameworks for the cumulative and interrelated effects of different layers of regulations which some risk management is about simple compliance with rules or about improving dialogue to help drive with pricing and investments, and approaching decision-making using a consistent risk management approach and presents the biggest challenge, but rather the combination of all at the same time that makes this a hugely An effective risk management framework prepares insurers to focus on two Overall, enhanced risk management programs and controls eliminate surprises The business case for enterprise risk management and informed supervision, if executed appropriately, is likely to strengthen the serve as the impetus for embedding data-driven and analytics-enabled practices into decision-making and performance management processes across the Corporate boards will be better positioned to offer direct oversight, provide guidance and, when necessary, challenge company strategy, decisions or risk as timely, accurate and comprehensive risk information pilots broader decision- for more intense regulatory scrutiny and to implement additional regulatory A mosaic of global reforms crisis, global insurers have faced a range of varying regulatory activity, as depicted mark a fundamental shift in how the industry is regulated: has designated some insurers as necessitate additional regulatory and supervisory requirements under the The European Insurance and Occupational Pensions Authority of the European Union has issued guidelines United States Dodd-Frank, Federal Reserve Supervision, Modernization initiative ORSA ey in uential bodies International Monetary Fund (IMF) Financial Stability Board (FSB) international body that monitors and makes recommendations to national authorities and standard setters The International Association is developing requirements for internationally active insurance groups (IAIGs), with the implication that such insurers may be subject to more Switzerland Europe Solvency II directive and the Insurance Core Principles (ICPs) elements to be put in place for effective There is growing consensus that more federal regulation and oversight is likely industry stakeholders are viewing these and now concerns that will soon be an Turkey Preliminary discussions held for China Preliminary discussions held for Representative quotes from Improved risk-based decision-making through a framework for risk, capital and performance management Increased understanding of risk exposures across the enterprise and the necessary controls and other approaches to mitigate them Promotion of a risk management culture and a higher place for risk on the senior management agenda Deeper insights into the solvency impacts of future economic conditions International Association of Insurance Supervisors (IAIS) ey lobal accountin standards IFRS Insurance contracts (FASB, IASB) Financial Instruments Standards Bermuda Japan Solvency II assessment (reinsurance) by-product for companies taking a best practices-based approach to addressing e ico Solvency II type regime Chile Undertaking examination of current regulatory framework in light of Solvency II Brazil Preliminary discussions held for Singapore Potential candidate for. Currently uses RBC and ERM-type framework. 4 ERM and the new world of insurance regulation ERM and the new world of insurance regulation 5
ORSA: a template for preparedness Many insurers that have completed an compliance and improved performance approach to compliance and seek ways to establish or strengthen the overall ERM from the NAIC describe a solid foundation for effective risk governance and risk management, with standards-based guidelines and leading practices for ERM A clearly articulated strategy and risk appetite set by the board, established Section 1: Description of the Insurer s Risk Management Framework assessment across the enterprise and embedded limits, tolerances and performance assessments An ongoing, enterprise-wide risk assessment across all risk types, including strategic risks, emerging risks and new product risks The use of a consistent set of criteria, including forward-looking risk metrics, to assess and quantify risk at a range of by common risk drivers A common risk language used across the accountability issues Timely, consistent and accurate reports for the board, senior management and other decision-makers that are generated from demonstrable risk control activities, the goal of which is to ensure these Governance and oversight Planning and decision-making alignment Risk measurement Risk reporting Data, technology and infrastructure Policies, training and culture leaders truly understand future risks, as well as past risks, to the stability and solvency of the enterprise rather than relying too much on hindsight, as has been true historically to produce timely risk and capital adequacy and solvency information Links between the risk management framework and pricing, new product design, performance measurement and capital allocation, which can serve to make risk management a more proactive practice across and at multiple levels of related to technical pricing and value contribution as core inputs to product design have discovered more effective metrics to Risk monitoring Section 2: Insurer s Assessment of Risk Exposures Section 3: Group Risk Capital and Assessment Make it practical equivalent regulations are now focusing on lowering the costs of maintaining their In some cases, there was too much emphasis on the details of the governance structure, processes and policies, and not enough on the high-level governance balance will enable insurers to enhance risk management effectiveness and keep Conclusion The pace of change in international and domestic insurance Domestic standards are being revised and strengthened in light of Nowhere is the drive for change more visible than in risk governance Insurers that do not adopt improvements to their risk management In contrast, forward-looking insurers that have accepted that reforms and as a result are already harvesting the value of stronger risk management frameworks The strategic view of regulatory reforms: seizing the opportunity of change increasing regulatory pressures as an opportunity to build an industry- The goal was to support business units in delivering better and more Taking a fresh look at its risk management approach in the context of day-to-day business activities, the insurer used industry benchmarks as the baseline for a new framework designed to enable the following: Deeper understanding of the relationship between risk and market segments, geographic locations, customer sets and product lines market opportunities and better responsiveness in terms of resource allocation Balancing of near-term business opportunities with long-term Easier demonstration of management insight into business risk and easing of regulatory pressure The bottom line: the insurer saw the clear and compelling business case in which improved risk management ultimately results in increased and Credit Insurance risk Market risk Liquidity Operational Compliance Reputational 6 ERM and the new world of insurance regulation ERM and the new world of insurance regulation 7
Contacts: Rick Marx Principal rick.marx@ey.com Tom Ward Partner tom.ward@ey.com Mark Watson Executive Director mark.watson@ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and leaders who team to deliver on our promises to all of our better working world for our people, for our clients and for Limited, a UK company limited by guarantee, does not EY is a leader in serving the global nancial services marketplace the world provide integrated assurance, tax, transaction and advisory services to our asset management, banking, capital worldwide align with key global industry groups, including EY s Global Wealth & Asset Management Center, Global Banking & Capital Markets Center, Global Insurance Center and Global Private Equity Center, which act as hubs for sharing industry-focused knowledge on current and emerging trends and regulations in order to help our clients and provide a well-rounded understanding of business issues With a global presence and industry-focused advice, assurance, tax, transaction and advisory services, including operations, process improvement, risk and technology, to ED None This material has been prepared for general informational purposes only and is ey.com