InsuranceERM Annual Awards 2022 - UK & Europe

Maximise your operational resilience

Rafael Cavestany, founder of The Analytics Boutique, explains how the vendor can support insurers in making their operational risk processes easier to use, more encompassing and forward looking

Why is operational resilience so important for insurers in today's environment?

Operational resilience has proven its critical importance in recent years, particularly during the Covid-19 pandemic. An exhaustive identification and evaluation of possible scenarios, together with the corresponding mitigation actions that are required, can decide an insurer's probability of survival during a crisis like Covid-19.

Rafael Cavestany

However, the operational risk function's influence in an organisation is often limited, and its warnings may not have the required impact. Too frequently, the output from operational risk solutions is inappropriate for upper and senior management's needs because the tools used are simply based on traffic lights and bubble charts, while management use pure economic measures to make decisions.

The Analytics Boutique's solution is used by top international institutions to create economic measures of operational risks, such as the monetary cost of risk and the net present value of mitigation plans, in addition to bubble charts. Our approach also allows an organisation to remain alert for emerging risks and maximise an institution's operational resilience.

Covid-19 has proven the need not only to evaluate potential risks, but to clearly define an action plan. For institutions to react swiftly when unexpected events occur, a clear business case must be built in advance to convince senior management of the need for action.

What are the key operational risk challenges insurers face today? For example, cyber risk?

Insurers face a diversity of operational risk challenges that include cyber risk, ESG compliance challenges and data risks.

The risk list evolves constantly and can end up being dominated by emerging risks or those considered recently unknown. It is critical an institution has a process to constantly review and revisit risk analysis to ensure emerging risks are quicky identified and action is taken.

The Analytics Boutique's solution incorporates the process to identify and constantly review the analysis of new threats and emerging risks.

Why should insurers come to The Analytics Boutique for operational risk expertise?

The Analytics Boutique focuses on providing precise and smart risk solutions using our unique quantification methodology, which includes Monte Carlo simulation, risk modelling and many other decision-making tools. These features provide a solid estimation of the economic metrics defining the risk environment where an insurer operates. This could include the monetary cost of assuming risk and resource allocation.

Top international insurers already use The Analytics Boutique to determine their capital requirements for Solvency II's ORSA, or the relevant regulation in multiple countries and jurisdictions. Our solutions have permitted insurers to obtain the necessary regulatory approval in record time.

With The Analytics Boutique, the influence of the operational risk function is maximised by creating economic risk measures that are understood by senior and upper management.

Does The Analytics Boutique plan to innovate its Structured Scenario Analysis (SSA) tool and develop other services?

The Analytics Boutique is further developing our capacity to model Bayesian networks for computing operational risk that is tailored to an institution's processes.

Secondly, our solutions are more intuitive and easier to understand by non-operational risk specialists, and particularly by management. In this respect, we are creating dashboards showing the value created, and return on investment offered, from different mitigation actions and types of insurance coverage.

Finally, we are increasing the integrability of our solution with other governance, risk and compliance vendors.

How do you expect the operational risk landscape for insurers to change in the next two years?

Insurer management teams will need to thoroughly understand the economic consequences of assuming risks and the benefits of transferring and mitigating them.

The current operational risk environment is volatile and will continue to require insurers to anticipate potential events and have the adequate controls in place before events materialise.

All in all, operational risk management will need to be more encompassing, more forward-looking and have an insurer's management fully involved.