Risk Management by Life Insurance Companies

(1)

THE IMPORTANCE OF

RISK MANAGEMENT PROCESSES

TO LIFE INSURANCE COMPANIES

Gilles Bernier,

Gilles Bernier, Ph.D

Ph.D..

Professor

Professor of Finance and of Finance and InsuranceInsurance Industrial

Industrial--Alliance Chair in Alliance Chair in Insurance

Insurance and Financial Servicesand Financial Services Faculty

Faculty of Business Administrationof Business Administration Laval

Laval UniversityUniversity Quebec

Quebec CityCity

2008 Joint Annual Conference of the 2008 Joint Annual Conference of the Compliance Section and Consumer Compliance Section and Consumer Compliance Section and Consumer Compliance Section and Consumer

Complaints Officers Section Complaints Officers Section Canadian Life and Health Insurance Canadian Life and Health Insurance

Association Inc. Association Inc. Association Inc. Association Inc.

Quebec

Quebec City, April 30, 2008City, April 30, 2008

www.fsa.ulaval.ca/chaire www.fsa.ulaval.ca/chaire--www.fsa.ulaval.ca/chaire www.fsa.ulaval.ca/chaire industriellealliance industriellealliance

(2)

WHAT ARE THE MAJOR

RISKS IN THE

LIFE INSURANCE

INDUSTRY?

(3)

RISK CATEGORIES

IN LIFE INSURANCE

(Source: IAG, MD&A 2007, p.33

))

(4)

SOURCES OF STRATEGIC RISK

IN THE LIFE INSURANCE SECTOR

As in As in mostmost industries, the industries, the questquest for for growthgrowth isis the main source of the main source of strategicstrategic

risk

risk in the lifein the life sectorsector.. risk

risk in the life in the life sectorsector. .

WhyWhy? ? BecauseBecause itit requiresrequires life life insuranceinsurance companiescompanies to to place place betsbets on on

specific specific::pp

–– ProductsProducts

–– Distribution Distribution channelschannels –– Customer segmentsCustomer segmentsgg –– New business New business modelsmodels

StrategicStrategic risk gg risk is the risk arising from is the risk arising from inadequate planning gg inadequate planning or a qq pp gg or a

company’s

company’s failure to effectively adapt failure to effectively adapt to the business environment:to the business environment: –– It It encompasses the various risks encompasses the various risks a life insurance company is a life insurance company is

exposed to through the implementation of its business strategy exposed to through the implementation of its business strategy

(i i d i l i k )

(insurance, investment and operational risks). (insurance, investment and operational risks).

(5)

WHY SHOULD LIFE INSURANCE

FIRMS MANAGE RISKS?

A life

A life insurance

insurance company’s

company’s value

value depends

depends directly

directly on

on its

its risk

risk

management

management policy

gg

policy in

p

y

in at

at least 2

least 2 ways

ways::

yy

–– Risk

Risk management by life

management by life insurance

insurance firms

firms affects the

affects the

probability

probability of

of financial

financial distress

distress and

and therefore

therefore the

the

ll

llll

premiums

premiums potential

potential customers

customers are

are willing

willing to

to pay

pay..

Customers

Customers focus on

focus on whether

whether financial

financial commitments

commitments

dd th

th

t

t ill

ill bb

t (

d t

lit

lit ))

under

under the

the contract

contract will

will be

be met (

met (product

product quality

quality).

).

–– The

The asset

asset risk

risk in an

in an insurance

insurance company’s

company’s private

private

placement

placement loan

loan portfolio

portfolio depends

depends on

on its

its customers

customers’’ risk

risk

placement

placement loan

loan portfolio

portfolio depends

depends on

on its

its customers

customers risk

risk

management

management policies

policies..

Hedging

Hedging by

by lenders

lenders is

is not a

not a subsitute

subsitute for

for hedging

hedging by

by

Hedging

Hedging by

by lenders

lenders is

is not a

not a subsitute

subsitute for

for hedging

hedging by

by

borrowers

(6)

IS RISK MANAGEMENT NEW TO

LIFE INSURANCE FIRMS?

Of course

Of course NOT

NOT!!

!!

Lif

Lif ii

fifi

h

l

l it d

l it d b th

b th

Life

Life insurance

insurance firms

firms have long

have long exploited

exploited both

both::

Risk

Risk--reduction

reduction benefits

benefits of

of diversification

diversification on

on both

both sides

sides of

of

the balance

the balance sheet

sheet;;

Reinsurance

Reinsurance to control

Reinsurance

Reinsurance to control

to control financial

financial implications of

implications of extreme

extreme

observations

observations from

from loss

loss distributions.

distributions.

Life

Life insurance

insurance firms

firms have

have also

also traditionnaly

traditionnaly relied

relied on a

on a variety

variety of

of

t l t h i

ff

th i

th i i k

i k

tt

control techniques

control techniques for

for their

their risk

risk management

management systems

systems.

.

Standards and

Standards and financial

financial reports;

reports;

Underwriting

Underwriting authority

authority and

and limits

limits;;

Investment

Investment guidelines and

guidelines and recommended

recommended positions;

positions;

Investment

Investment guidelines and

guidelines and recommended

recommended positions;

positions;

Incentive

Incentive schemes

schemes making

making compensation

compensation risk

risk--related

related..

More

More recently

recently life

life insurance

insurance firms

firms have

have also

also been

been relying

relying more

more

More

More recently

recently, life

, life insurance

insurance firms

firms have

have also

also been

been relying

relying more

more

intensively

intensively on

on derivative

derivative products

products (options, futures, swaps, etc.) for

(options, futures, swaps, etc.) for

hedging

(7)

WHY ARE RISK MANAGEMENT PRACTICES OF

LIFE INSURANCE FIRMS STILL EVOLVING?

BecauseBecause life life insurersinsurers feelfeel the the needneed for for upgradingupgrading theirtheir RM RM activitiesactivities, in , in

light of: light of:

Dramatic

Dramatic riserise in thein the numbernumber ofof insolventinsolvent insurersinsurers in the USAin the USA –– DramaticDramatic riserise in the in the numbernumber of of insolventinsolvent insurersinsurers in the USA in the USA

during

during the 90’s. [Babbel & the 90’s. [Babbel & SantomeroSantomero (1999)](1999)]

WideWide arrayarray of causes:of causes: R idl

R idl i ii i d li id li i ii

–– RapidlyRapidly risingrising or or decliningdeclining interestinterest ratesrates

–– LossesLosses on on assetsassets ((junkjunk bonds, real bonds, real estateestate, , derivativesderivatives, …etc.), …etc.) –– MispricingMispricing of of policiespolicies

–– «« ChurningChurning » ofChurningChurning of » of policies of policiespolicies by sales agentspolicies by sales agentsby sales agentsby sales agents –– InsolvenciesInsolvencies of of reinsurersreinsurers

–– NonNon--compliancecompliance withwith regulationregulation

–– MalfeasanceMalfeasance of officiers and of officiers and directorsdirectors –– Canadian life Canadian life insuranceinsurance sectorsector isis no exception:no exception:

3 3 failuresfailures in Canada in Canada duringduring the 90’s.gg the 90’s.

Pressure for life Pressure for life firmsfirms to to adoptadopt more effective more effective riskrisk management management policiespolicies alsoalso

comes

(8)

HOW ARE RISK MANAGEMENT

PRACTICES EVOLVING?

More and more by More and more by implementingimplementing an effective «an effective « Enterprise Enterprise RiskRisk

Management

Management » » processprocess able to:able to:

–– assimilateassimilate, , analyzeanalyze and and integrateintegrate data data fromfrom a a widewide varietyvariety of sources of sources within

within the life the life insuranceinsurance firmfirm in in orderorder to:to:

prevent downfallspreventpreventprevent downfallsdownfalls thatdownfalls thatthat couldthat couldcould stop thecould stop the stop the organizationstop the organizationorganization fromorganization fromfrom achievingfrom achievingachievingachieving

its

its goals or goals or eveneven threatenthreaten itsits survivalsurvival;;

seekseek new new opportunitiesopportunities to move the agenda of the to move the agenda of the organizationorganization

forward forward forward forward..

ThroughThrough goodgood riskrisk governancegovernance::

hh dd ll ll

–– AtAt the the BoardBoard levellevel!!

BoardBoard membersmembers are are expectedexpected to to establishestablish whetherwhether the the firmfirm isis in in

control

control and and thatthat RM processes inform business decision-making;p g;

(9)

ATTRIBUTES OF «

ATTRIBUTES OF « ERM

ERM »

»

It It isis a a dynamicdynamic processprocess trackingtracking changes in the changes in the organizationorganization in in orderorder to to

remain

remain effective;effective;

It It isis ledled atat a a highhigh levellevel balancedbalanced withwith thatthat abilityability to to acceptaccept input input fromfrom anyany

level level;;

It It helpshelps manage manage risksrisks in a more in a more comprehensivecomprehensive//integratedintegrated wayway, , soso thatthat the the

organization

organization cancan achieveachieve itsits goals goals and and createcreate value value ;;

ERM

ERM ii thth b llb ll ff i ti t ll ditdit dd lili dd idid

ERM ERM isis the the umbrellaumbrella for for internalinternal audit and audit and compliancecompliance, and , and providesprovides

for

for formalformal relationshipsrelationships betweenbetween otherother riskrisk--basedbased functionsfunctions;;

ItsIts mainmain benefitsbenefits are:are:

ItsIts main main benefitsbenefits are:are:

–– ReductionReduction of the of the overlapoverlap of RM efforts (of RM efforts (lessless redundantredundant);); –– LeverageLeverage existingexisting RM RM processesprocesses and and resourcesresources;;

Create

Create aa commoncommon understandingunderstanding ofof risksrisks acrossacross thethe firmfirm;; –– CreateCreate a a commoncommon understandingunderstanding of of risksrisks acrossacross the the firmfirm;; –– BetterBetter identifyidentify riskrisk interdependenciesinterdependencies..

(10)

BOARD’s

BOARD’s ROLE W/R TO «

ROLE W/R TO « ERM

ERM »

»

[Source:

[Source: GreenhillGreenhill (2006)](2006)] [[ (( )])]

The

The Board

Board should

should participate

participate in ERM by:

in ERM by:

–– providing

providing oversight

oversight on the

on the need

need for and

for and level

level of sophistication

of sophistication

of

of risk

risk management

management required

required by the

by the organization

organization;;

–– forcing managers to

forcing managers to think

forcing managers to

forcing managers to think

think more

more systematically

systematically about the

about the

future

future,

, thereby

thereby limiting

limiting downside

downside risk

risk and

and improving

improving the

the odds

odds

of

of success

success behind

behind chosen

chosen growth

growth strategies

strategies;;

hh

ff

dd

hh l

l

l ff i k

i k

–– concurring

concurring with

with or, if

or, if necessary

necessary,

, disputing

disputing the

the level

level of

of risk

risk

tolerance

tolerance established

established by management;

by management;

–– ensuring

ensuring that

ensuring

that risk

risk management

management is

is carried

carried out on a

out on a continuous

continuous

basis:

Audit

Audit committee

committee often

often tasked

tasked with

with ensuring

ensuring that

that RM

RM systems

systems

are in place and

are in place and assessing

assessing their

their effectiveness

effectiveness..

If

If deemed

deemed necessary

necessary, a

, a separate

separate risk

risk management

management

committee

(11)

EXAMPLES OF RIGHT QUESTIONS FOR

BOARD MEMBERS TO ASK

Questions about:

Questions about: [[Greenhill

Greenhill (2006)]

(2006)]

–– RISK IDENTIFICATION

RISK IDENTIFICATION

Do

Do we

we have a

have a common

common understanding

understanding of

of each

each risk

risk??

AA

hh

i di

i

f

h l i l

h l i l bi

bi

hh

ld

ld ff

ff

Are

Are there

there indications of

indications of psychological

psychological biases

biases that

that could

could affect

affect

the identification

the identification process

process? (e.g.,

? (e.g., groupthink

groupthink biais,

biais, optimism

optimism

biais, perspective biais)

–– RISK ANALYSIS

RISK ANALYSIS

What

What percentage

percentage of the

of the company

company’ value

’ value could

could be

be affected

affected by

by

the

the different

different risks

risks??

Is

Is there

there a «

a « framing

framing »

» bias

bias in the

in the way

way risks

risks are

are presented

presented to

to

us and

us and evaluated

evaluated by management?

by management?

What

What is

is the

the likelihood

likelihood of the

of the risks

risks occuring

occuring? Is

? Is itit increasing

increasing,

,

decreasing

(12)

EXAMPLES OF RIGHT QUESTIONS FOR

BOARD MEMBERS TO ASK (

BOARD MEMBERS TO ASK (cont

cont’)

’)

BOARD MEMBERS TO ASK (

BOARD MEMBERS TO ASK (cont

cont ))

Questions about :

Questions about : [[Greenhill

Greenhill (2006)]

(2006)]

–– RESPONSESRESPONSES

WhatWhat are the are the responsesresponses for the for the higherhigher prioritypriority risksrisks ??

Is the residualIs theIs the Is the residualresidual riskresidual riskrisk withinrisk withinwithin thewithin the the organizationthe organizationorganization s toleranceorganization’ s tolerance’ s tolerance level s tolerance levellevel??level?? –– IMPLEMENTATIONIMPLEMENTATION

WhoWho isWhoWho isis managingis managingmanaging eachmanaging eacheach of theeach of the of the responsesof the responsesresponses??responses??

If a If a responseresponse isis not in place, not in place, whatwhat isis the the timelinetimeline for for

implementation implementation??

What isWhatWhatWhat isis theis the the processthe processprocess for process forfor verifyingfor verifyingverifying thatverifying thatthat responsesthat responsesresponses are in place?responses are in place?are in place?are in place?

–– MONITORINGMONITORING

What metricsWhatWhatWhat metricsmetrics aremetrics are are usedare usedused to used toto measureto measuremeasure themeasure the the effectivenessthe effectivenesseffectiveness of the ERM effectiveness of the ERMof the ERMof the ERM

program? program?

(13)

IMPORTANCE OF RM PROCESSES:

LESSONS FROM THE PAST

Class actions for «

Class actions for « vanishing

vanishing premium

premium »

» policies

policies::

Class actions for «

Class actions for « vanishing

vanishing premium

premium »

» policies

policies::

–– Importance for life

Importance for life insurers

insurers to

to act

act in

in order

order to

to avoid

avoid future

future

bl

i t d

i t d ith

ith ll

ll

d

tt i

i

t ti

problems

problems associated

associated with

with alleged

alleged agent

agent misrepresentation

misrepresentation;;

–– Greater

Greater importance

Greater

importance is

is devoted

devoted to

to compliance

compliance in

in order

order to

to

train and monitor the

train and monitor the behavior

behavior of sales agents;

of sales agents;

C t l

h

b

t i

l

b

t

–– Control

Control measures

measures have been put in place by management

have been put in place by management

to

to favor

favor compliance

compliance before

before new

new policies

policies are

are issued

issued;;

(14)

IMPORTANCE OF RM PROCESSES:

LESSONS FROM THE PAST (

LESSONS FROM THE PAST (cont

cont’)

’)

LESSONS FROM THE PAST (

LESSONS FROM THE PAST (cont

cont ))

RecentRecent«« AssetAsset--BackedBacked Commercial Commercial PaperPaper » » crisiscrisis in Canadain Canada::

–– EvaluationEvaluation of of creditcredit rating continues to rating continues to bebe an an impreciseimprecise processprocess;; Do

Do youryour ownown internalinternal creditcredit riskrisk assessmentassessment eveneven for shortfor short termterm –– Do Do youryour ownown internalinternal creditcredit riskrisk assessmentassessment, , eveneven for shortfor short--termterm

investments investments

Do not Do not relyrely onlyonly on one rating on one rating agency’sagency’s opinion;opinion;

NeverNever underunder estimateestimate agencyagency riskrisk whenwhen assetsassets areare valuedvalued by aby a Never Never underunder--estimateestimate agencyagency riskrisk whenwhen assetsassets are are valuedvalued by a by a

third

third--partyparty Request

Request moremore transparencytransparency fromfrom issuersissuers –– RequestRequest more more transparencytransparency fromfrom issuersissuers

Know Know whatwhat youyou investinvest in!in! C dit

C dit i ki k t it i li iditli idit blbl dd tt –– CreditCredit riskrisk maymay trigger trigger liquidityliquidity problemsproblems due to due to

mismatch

mismatch……potentiallypotentially impactingimpacting a life a life insurer’sinsurer’s reputationreputation and and itsits franchise value.

(15)

IMPORTANCE OF RM PROCESSES:

LESSONS FROM THE PAST (

LESSONS FROM THE PAST (cont

cont’)

’)

LESSONS FROM THE PAST (

LESSONS FROM THE PAST (cont

cont ))

Past

Past cases of

cases of derivative

derivative mishaps

mishaps:

: [Hull (2007)]

[Hull (2007)]

–– Derivatives

Derivatives can

can be

be used

used for

for either

either hedging

hedging or

or speculation

speculation;

; that

that is

is,

,

they

they can

can be

be used

used to

to reduce

reduce risks

risks or to

or to take

take risks

risks;;

–– Most

Most losses

losses occured

occured because

because employees

employees who

who had

had an explicit or

an explicit or

implicit

implicit mandate to

mandate to hedge

hedge their

their firm’s

firm’s risk

risk (Barings, Orange

(Barings, Orange

County

County, LTCM)

yy,

, LTCM) decided

,

)

decided instead

instead to

to speculate

speculate;;

p

;;

–– Importance of

Importance of having

having a

a clear

clear and

and unambiguous

unambiguous policy

policy statement

statement

on how

on how derivatives

derivatives can

can be

be used

used and the

and the extent

extent to

to which

which it

it is

is

on how

on how derivatives

derivatives can

can be

be used

used and the

and the extent

extent to

to which

which it

it is

is

permissible

permissible for

for employees

employees to

to take

take positions

positions on

on movements

movements in

in

market

market variables;

variables;

–– Internal

Internal controls

controls must

must be

be set in place to

set in place to ensure

ensure the

the policy

policy is

is

carried

(16)

IMPORTANCE OF RM PROCESSES:

LESSONS FROM THE PAST (

LESSONS FROM THE PAST (cont

cont’)

’)

LESSONS FROM THE PAST (

LESSONS FROM THE PAST (cont

cont ))

Past

Past cases of

cases of derivative

derivative mishaps

mishaps:[Hull (2007)]

:[Hull (2007)]

–– «« Giving

Giving individuals

individuals the

the authority

authority to

to trade

trade derivatives

derivatives wihtout

wihtout

closely

closely monitoring the

monitoring the risks

risks being

being taken

taken is

is nothing

nothing short of

short of a

a

recipe

recipe for

for disaster

disaster » (Hull p 36);

» (Hull p 36);

recipe

recipe for

for disaster

disaster » (Hull, p.36);

» (Hull, p.36);

–– «« When

When financial

financial markets

markets experience

experience a

a shock

shock of one sort or

of one sort or

hh

li

idi

‘bl k

‘bl k h l

h l ’’

d

l

illi id

illi id ii

another

another,

, liquidity

liquidity ‘black

‘black holes

holes’ ’ may

may develop

develop…

…illiquid

illiquid instruments

instruments

often

often sell

sell at

at a

a big

big discount to

discount to their

their theoretical

theoretical values

values » (Hull, p.35)

» (Hull, p.35)

–– «« When

When everyone

everyone is

is following

following the

the same

same trading

trading strategy

strategy,

,

beware

beware!! »»

Case of British

Case of British insurance

insurance companies

companies in

in late

late 1990’s all

1990’s all hedging

hedging

their

their exposure

exposure to a

to a fall

fall in long

in long--term

term interest

interest rates

rates at

at about the

about the

same

(17)

POSITIONING CANADIAN

LIFE INSURERS W/R TO «

LIFE INSURERS W/R TO « ERM

ERM »

»

LIFE INSURERS W/R TO «

LIFE INSURERS W/R TO « ERM

ERM »

»

Major Canadian life

Major Canadian life insurance

insurance firms

firms can

can be

be considered

considered

more

more advanced

advanced practionners

practionners of ERM

of ERM

more

more advanced

advanced practionners

practionners of ERM.

of ERM.

Why

Why?? Because

yy

Because they

they appear

yy pp

appear to:

pp

to:

–– treat

treat ERM as

ERM as being

being more

more than

than just

just an extension of

an extension of

their

their audit and

audit and regulatory

regulatory compliance

compliance processes

processes;;

tif

i k

dd li k

li k th

th

t

it l ll

ti

–– quantify

quantify many

many risks

risks and

and link

link them

them to capital allocation

to capital allocation

and

and risk

risk--transfer

transfer decisions

decisions;;

–– often

often rely

often

often rely

rely on a cross

on a cross--functional

on a cross functional

functional risk

risk management

management

committee

committee;;

(18)

POSITIONING CANADIAN

LIFE INSURERS W/R TO «

LIFE INSURERS W/R TO « ERM

ERM » (

» (cont

cont’)

’)

LIFE INSURERS W/R TO

LIFE INSURERS W/R TO ERM

ERM (

(cont

cont ))

But

But what

what about

about smaller

smaller companies

companies as

as well

well as

as

But

But what

what about

about smaller

smaller companies

companies as

as well

well as

as

larger

larger but

but relatively

relatively less

less sophisticated

sophisticated ones

ones??

–– We

We may

may suspect

suspect that

that their

their RM

RM approaches

approaches are

are

probably

probably less

less precise

precise and

and significantly

significantly less

less

probably

probably less

less precise

precise and

and significantly

significantly less

less

analytical

analytical..

Overall

Overall,

, there

there is

is probably

probably still

still room for

room for

improvement

(19)

HOW CAN RISK MANAGEMENT

PROCESSES BE IMPROVED?

By

By always

always questioning the

questioning the cohesiveness

cohesiveness of the

of the current

current

RM

RM framework

framework;;

RM

RM framework

framework;;

By

By relying

relying on a

on a structured

structured,, bottom

bottom--up

up Top

Top--10

10 risk

risk

By

By relying

relying on a

on a structured

structured,

, bottom

bottom up

up Top

Top 10

10 risk

risk

process

process which

which addresses

addresses both

both financial

financial and non

and

non--financial

financial risks

risks;;

By

By developing

developing a

a healthy

healthy risk

risk culture

culture inside

inside the

the firm

firm,

,

fostering

fostering prompt

prompt reporting

reporting of

of risks

risks, incidents and

, incidents and

fostering

fostering prompt

prompt reporting

reporting of

of risks

risks, incidents and

, incidents and

breaches

breaches;;

By

By taking

taking the

the approach

approach that

that «« everyone

everyone is

is a

a risk

risk

manager

(20)

HOW CAN RISK MANAGEMENT

PROCESSES BE IMPROVED? (

PROCESSES BE IMPROVED? (cont

cont’)

’)

PROCESSES BE IMPROVED? (

PROCESSES BE IMPROVED? (cont

cont ))

By

By trying

trying to

to learn

learn more about

more about less

less quantifiable

quantifiable risks

risks

((such

such as

as operational

operational risk

risk):

):

((such

such as

as operational

operational risk

risk):

):

–– It

It involves

involves two

two things

things: [as

: [as suggested

suggested by

by Apgar

Apgar (2006)]

(2006)]

First

First, the formulation of possible solutions to

, the formulation of possible solutions to problems

problems

posed

posed by the

by the risk

risk or possible

or possible answers

answers to questions

to questions

posed

posed by the

by the risk

risk, or possible

, or possible answers

answers to questions

to questions

about

about what

what drives

drives itit;;

S

d

S

d

hh

h h

Second

Second,

, itit requires

requires experience

experience that

that can

can show

show which

which

solutions

solutions may

may be

be right,

right, which

which are

are wrong

wrong, or

, or whether

whether

we

(21)

HOW CAN RISK MANAGEMENT

PROCESSES BE IMPROVED? (

PROCESSES BE IMPROVED? (cont

cont’)

’)

PROCESSES BE IMPROVED? (

PROCESSES BE IMPROVED? (cont

cont ))

By

By learning

learning from

from failure

failure [[Edmondson

Edmondson &

& Cannon

Cannon, (2007)]

, (2007)]

–– «« Small Small failuresfailures are are oftenoften the ‘the ‘earlyearly warning warning signssigns’ ’ whichwhich, if , if detecteddetected and

and addressedaddressed, , maymay bebe the the keykey to to avoidingavoiding catastrophiccatastrophic failurefailure in the in the future

future ».».

–– «« WhenWhen smallsmall failuresfailures are not are not identifiedidentified widelywidely, , discusseddiscussed and and analyzedanalyzed, , itit isis veryvery difficultdifficult for for largerlarger failuresfailures to to bebe preventedprevented ».».

–– «« Managers Managers needneed to to createcreate an an environmentenvironment in in whichwhich theythey and and theirtheir employees

employees are open to putting are open to putting asideaside theirtheir selfself--protective protective defensesdefenses, and , and di

di i t di t d ithith i iti it dd d id i tt ll ff f ilf il responding

responding insteadinstead withwith curiositycuriosity and a and a desiredesire to to learnlearn fromfrom failurefailure ».». –– «« ReframingReframing failurefailure fromfrom somethingsomething associatedassociated withwith shameshame and and

weakness

weakness toto somethingsomething associatedassociated withwith riskrisk uncertaintyuncertainty andand weakness

weakness to to somethingsomething associatedassociated withwith riskrisk, , uncertaintyuncertainty and and improvement

(22)

HOW CAN RISK MANAGEMENT

PROCESSES BE IMPROVED? (

PROCESSES BE IMPROVED? (cont

cont’)

’)

PROCESSES BE IMPROVED? (

PROCESSES BE IMPROVED? (cont

cont ))

By

By establishing

establishing RM

RM reporting

reporting procedures

procedures such

such as

as market

market

risk

risk tolerance

tolerance limit

limit reports

reports earnings

earnings--at

at--risk

risk reports etc ;

reports etc ;

risk

risk tolerance

tolerance limit

limit reports,

reports, earnings

earnings at

at risk

risk reports, etc.;

reports, etc.;

Through

Through the

the continual

continual development

development of

of technical

technical tools

tools::

–– W/r to

W/r to insurance

insurance risks

risks, computer

, computer technology

technology now

now allows

allows

for

for better

better policy

policy pricing

pricing and

and risk

risk analysis

analysis through

through the

the

for

for better

better policy

policy pricing

pricing and

and risk

risk analysis

analysis through

through the

the

modeling

modeling of the

of the interest

interest--rate

rate sensitivity

sensitivity of

of policy

policy

cash

cash flows

flows;;

–– W/r to

W/r to investment

investment risks

risks,

, ALM techniques and scenario

ALM techniques and scenario

testing

testing can

can now

now be

be much

much more

more sophisticated

sophisticated as life

as life

insurers

insurers may

may rely

rely on

on more consistent

more consistent valuation

valuation

methodologies

(23)

CONCLUSIONS

It has been

It has been said

said that

that the

the only

only certainties

certainties in life are

in life are

death

death and taxes

and taxes..

The

The only

only certainty

certainty in modern business,

in modern business, including

including the life

the life

insurance

insurance sector

sector is

is that

that there

there is

is no escape

no escape from

from risk

risk!!

!!

insurance

insurance sector

sector,

, is

is that

that there

there is

is no escape

no escape from

from risk

risk!!

!!

–– In

In today’s

In

In today s

today’s world a life

today s world, a life

world a life insurer’s

world, a life insurer s

insurer’s risk

insurer s risk

risk strategy

strategy cannot

cannot

be

be separated

separated from

from its

its growth

growth strategy

strategy..

Ultimately

Ultimately ERM, as a

ERM, as a process

process,

, is

is a

a form

form of

of general

general

management

management aiming

aiming at

at ensuring

ensuring an

an

organization’s

organization’s continuous

continuous improvement

improvement

organization s

(24)

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