Sustainable growth in the insurance industry

Many insurers in mature markets such as Western Europe and North America are facing limited organic growth opportunities, insurance risk and capital management challenges, and increased regulation — factors that may persist for some time to come. In addition, certain insurance megatrends, including the rise of social media and the growth of big data, will pose additional hurdles for insurance industry growth well into the future.

•Does your company have an articulated risk and capital management strategy?

•How efficient are your financial modeling processes?

•Are you considering M&A opportunities in rapidly growing markets?

•Are you using predictive modeling to inform product management and pricing?

•How will shifting demographics affect your business?

Insurers Can Use Risk Appetite Statements More Effectively

Many senior insurance executives are dissatisfied with the business advantages gained so far from the investment of time and money in developing risk appetite statements, according to an ongoing series of discussion papers published by global professional services company Towers Watson.

In Risk Appetite Revisited, the company recommends methods for realigning risk taking with business mission and strategy. The paper highlights the need for a framework of risk tolerances and risk limits that can be monitored in real time to support day-to-day decision making within a business. An earlier paper, Another Bite at the Apple, looked at the broader question of how to make risk appetite statements actionable so as to encompass not only risks to tangible financial value but also risk to more intangible forms of capital such as human, brand and intellectual.

Towers Watson’s Global Enterprise Risk Management (ERM) Survey found that nearly three-quarters of insurers (74 percent) now have defined risk appetite policy statements, yet just 43 percent have demonstrated consistency with their risk limit structure. In addition, over three-quarters recognized the need to further develop their risk appetite statements, with 40 percent listing it as their top ERM priority.

“Many insurers are concerned that their risk appetite statements don’t synchronize with the daily running of the business,” said Martha Winslow, Towers Watson’s Property & Casualty ERM practice leader for the Americas. “In fact, one chief executive who participated in the survey described his company’s risk appetite statement as ‘high quality, but somewhat sterile.’ To some extent, this sentiment stems from development efforts that have been driven by external regulatory compliance requirements.”

Towers Watson proposes that companies may be able to better align risk appetite with the business mission by organizing their objectives into four quadrants: achieving targeted performance, preserving capital adequacy, maintaining liquidity and protecting franchise value. Companies might also consider embracing certain methods for managing risk tolerance and improving the testing of long-term risk resilience, in particular, by introducing the idea of “adaptive buffers.” These are financial and nonfinancial measures that can assist virtual live monitoring of risk tolerance while covering all mission-critical aspects of the business, such as capital buffers, reinsurance and hedging, rating agency relationships, employee engagement and customer affinity programs.

“Linking risk appetite to mission impairment and building in appropriate metrics are essential steps in moving statements from being theoretical to actionable in our view,” said Mark Scanlon, Towers Watson’s Life ERM practice leader for the Americas.