Tapping the opportunities created by advances in risk management may not be as difficult as some think, as Marcus Bowser and Kirsty Leece explain
Insurers have invested significant amounts of money in their risk management over the last few years, driven extensively by the requirements of Solvency II and increasing demands from other stakeholders.
Extracting wider value from this investment, beyond ensuring regulatory compliance, remains a largely untapped opportunity for many insurers. But, in many cases, it only requires marginal extra investment and effort.
In some quarters, there is a view that risk management is purely a downside consideration, rather than an opportunity. While downside risk management can add value, to the extent that it prevents losses, a lot of the value of risk management comes from informed strategic risk management (from risk taking to risk transfer) and its use in business decisions (specifically around questions such as which risks to take, why and how much?).
There are no shortage of examples where recent risk management developments have tangibly added value, for instance:
- the development and use of the internal model in stress testing and contingency planning, as well as use by the wider business, to inform businesses of all options available under different environments;
- a risk appetite framework that effectively assesses areas where less, and more, risk should be taken; and
- risk identification and management to combat increasing operational risks, such as cyber-risk.
For risk management to make its fullest contribution to the business, insurers need a functioning framework. This can be described in three elements: first, a solid organisational bedrock, ingredients for which include a culture that encourages the shared ownership of risk management, a robust governance structure, and frameworks for risk appetite and capital allocation.
Second, tools are required to support the implementation of the risk framework, as they are critical to the measurement of risk, both from a capital and value perspective. Core tools include risk and capital models, and data warehousing that can support sophisticated and fast analytics.
In the third element are the processes of operationalising risk management: for example, horizon scanning to detect emerging risks.
In the coming months, Willis Towers Watson will publish a series of articles that detail the practical steps companies might take to improve how risk is managed to add business value.
The seven-part series of thought leadership pieces begins with a discussion of the ERM framework.
The next three papers focus on contingency planning, governance and risk appetite frameworks; these will be followed by a paper on the outcomes of considering the benefits to the business for optimising capital, and another paper on reinforcing the benefits of solid downside risk management, looking at cyber and conduct risk.
The series will conclude with the results of a market survey on the topics covered in this series.
We invite you to download part one here.
Marcus Bowser is UK Life Sales & Practice Leader and Kirsty Leece is a Senior Consultant at Willis Towers Watson