Risk & Capital


Risk Management

Risk, Capital, and Profitability are inherently linked; understanding the interaction between these and ensuring that key features of the business are properly captured within risk models is key to robust risk management.


Robust risk management and the optimisation of capital has become increasingly important for insurers as they continue to attract intense regulatory attention and endure the headwinds of subdued financial market performance.

In our view the key stages of ongoing risk management are:

  • Identification

  • We can advise on the structure, responsibilities, and expertise required for internal risk committees to identify and monitor risks across the business effectively, as well as providing support on aggregating and prioritising different types of risk.

  • Measurement

  • We are experts in building models to measure and report insurance and financial risk exposures, and can leverage this experience to develop new and innovative solutions based on the client’s existing modelling capabilities to minimise costs.

  • Management

  • We can help management establish effective processes to set the company’s risk appetite and embed this within the business, including the training of management and Board representatives on risk management if necessary.

  • Monitoring

  • We can build proxy models and representative risk indicators which can be used to allow risks to be monitored on a more frequent basis than would otherwise be possible using more traditional modelling.

  • Reporting

  • We can help build clear and useful templates for management information and regulatory reporting from the data and risk information available to the business.

  • Regulatory Developments

  • SII is an evolving standard which will be reviewed by the European Commission on an ongoing basis. Local regulators have also begun adjusting their guidance to firms on interpretation of specific points of the rules.

  • We can help firms assess the impact of proposed changes to the SII regulations on their business, as well as developing and validating any required model changes.


Capital Optimisation

Optimising capital represents an opportunity for insurers, but a holistic view of the business is required for successful results.


We see the most important steps in building a robust capital optimisation framework as:

  • Understanding the Operating Environment

  • We consider the constraints on capitalisation which arise from local regulations, underlying risks, accounting measures, and rating agency or analyst views of capital.

  • Determining Risk Appetites & Capital Goals

  • Capital optimisation decisions need to consider the organisation’s risk appetites, capital targets, and the potential impact of any actions on the company’s underlying risk exposures.

  • Modelling Risk, Capital & Profit

  • An insurer’s risk exposures, capital position, and expected profitability are all fundamentally connected. Understanding these connections is necessary to make informed decisions on how to optimise capital.

  • Identifying and Assessing Potential Actions

  • There are a wide variety of actions which could be used to optimise capital; a consistent and systematic approach to evaluating and comparing these is necessary to identify the most material opportunities to focus on.

  • The costs of any actions need to be included in decision making, including the time needed for implementation, execution risks, the associated costs and necessary resources.

  • Reporting

  • We can help build clear and useful templates for management information and regulatory reporting from the data and risk information available to the business.

  • Regulatory Developments

  • SII is an evolving standard which will be reviewed by the European Commission on an ongoing basis. Local regulators have also begun adjusting their guidance to firms on interpretation of specific points of the rules.

  • We can help firms assess the impact of proposed changes to the SII regulations on their business, as well as develop and validate any required model changes.

Potential management actions that firms may want to consider to optimise capital include:

  • Adjusting Investment Strategies

  • 4most can help insurers incorporate capital impacts into portfolio allocation decisions to allow the balance between investment returns and capital requirements to be optimised.

  • We can also model the impact that improving asset-liability matching or increased use of derivatives could have on capital requirements.

  • Reviewing Corporate Financing

  • 4most can help test the capital implications of different financing arrangements under local and international regulations to help insurers optimise their cost of capital.

  • Corporate Restructuring and Changing Portfolio Exposures

  • We are also able to help estimate the potential diversification benefits which could arise from different entities in the business being brought together, new product types being sold, or from M&A activity.

  • Reinsurance

  • 4most can model the impacts of different reinsurance arrangements on risk exposures and capital requirements to allow firms to optimise their coverage.

  • We can also estimate the embedded value of different areas of the business to inform decisions around value of in-force (VIF) monetisation.

  • Enhancing Risk Modelling

  • 4most has extensive experience in building modern risk models incorporating latest best-practice techniques under a number of different statutory and regulatory bases including IFRS and Solvency II. This can enhance risk management and potentially reduce capital requirements.

 

For further information, please contact one of our Leadership team, Ramesh Indran: ramesh.indran@4-most.co.uk or Chintan Patel: chintan.patel@4-most.co.uk.


 
 

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