Global Risk Management Survey - Insurance Spotlight | Deloitte

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Global Risk Management Survey 10th Edition - Insurance Spotlight

Heightened uncertainty signals new challenges ahead

The 10th edition of the Global Risk Management Survey is the latest installment in Deloitte's assessment of the state of risk management in the global financial services industry. In this article we take a closer look at the Insurance sector.

“The biggest challenge is actually thinking through, developing and implementing plans of business model changes in the face of these short- and medium-term drivers. It’s increasingly difficult to adapt a successful and profitable business based on historical capital and margins expectations.” - Chief Risk Officer, major global insurance and asset management company

Solvency II

Insurance companies across the globe have been facing increased regulatory capital requirements for some time. The most influential capital adequacy regime has been Solvency II (SII), which was developed by EU regulators for insurance companies and is now being considered by insurance companies around the world. Eighty percent of the companies participating in the survey are either subject to SII requirements (38 percent), subject to similar regulatory capital requirements (40 percent), or not subject to SII or similar requirements but have voluntarily adopted SII (3 percent). Even when not a regulatory requirement, SII is becoming more accepted as a standard when companies develop the assumptions and methods in their internal economic capital models.

Insurance companies employing SII or similar requirements were overwhelmingly outside the United States/Canada, where 80 percent of companies said they were not subject to SII or similar requirements and have not adopted them. As would be expected, insurers are more likely to be complying with SII or similar requirements (82 percent) than are investment management firms (74 percent) or banks (56 percent). When asked which areas respondents expected their company to focus on related to SII or similar regulatory capital requirements over the next two years, respondents most often named scenario analysis (66 percent). SII calculations require a wide array of data from multiple sources, and data infrastructure and data handling requirements (63 percent, down from 87 percent in 2014) was cited as a focus by many respondents.

Global Risk Management Survey 10th Edition

Assessing insurance risk

The most common methods used by insurance companies as a primary methodology to assess insurance risk are actuarial reserving (72 percent) and regulatory capital (59 percent). See figure below. Actuarial reserving has traditionally used best estimate assumptions to determine the expected present value of future cash flows related to insurance risk, while regulatory capital represents the amount of additional capital a company should set aside to cover an extreme insurance risk event.

Usage of primary and secondary methods to assess insurance risk

Stress testing is used by 72 percent of insurance companies to assess insurance risk, with 33 percent using it as a primary methodology and 39 percent as a secondary methodology. This is consistent with the regulatory focus on stress testing. (See the discussion above in this section.) What are the most common risk factors that insurance companies are stressing? Among the insurers that conduct stress testing, stress tests are conducted most often on interest rate (83 percent) and property and casualty cost (76 percent). The other items cited were mortality (59 percent), lapse (55 percent), expense (55 percent), and morbidity (52 percent). However, few small companies perform stress testing on mortality (10 percent), lapse (20 percent), expense (30 percent), and morbidity (10 percent), which is likely due to a lack of resources. Seventeen percent of respondents said they performed stress testing on other factors, such as strategic risk. Across the insurance industry, there is a heightened awareness of the importance of managing strategic and operational risk, and companies are grappling with how to credibly measure and manage these risks.

Economic capital is used as either a primary or secondary methodology to assess insurance risk more often by large (82 percent) than by mid-size (50 percent) or small insurers (54 percent). Larger insurers tend to have the more sophisticated capabilities required to create robust internal capital modes, which are often either loosely or tightly based on SII. The somewhat rote, but still complicated calculations in the value-at-risk analysis are used more often by mid-size insurers (67 percent) as a primary or secondary methodology than by large (45 percent) or small insurers (45 percent). The simplistic claims ratio analysis is used more often as either a primary or secondary methodology by mid-size (75 percent) and small insurers (83 percent) than by larger insurance companies (50 percent).

Questions?

For more information, please contact Marco Vet via mvet@deloitte.nl / +31882881049 or Eelco Schnezler via eschnezler@deloitte.nl / +31882885220

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