With signs of recovery and growth in the financial sector since the second half of 2009, many insurers have realigned their operations to position themselves for future growth. However, their levels of success will depend on careful investment choices and more sophisticated levels of risk management. Insurers in Asia Pacific are starting to look more closely at Enterprise Risk Management (ERM) frameworks as a way to achieve this.
"The business of insurance is becoming more complex," says Mary Trussell, Insurance Advisory Services partner based in Hong Kong. "This is partly due to product innovation, but also as a result of insurance groups entering other areas of financial services, , entering new markets and seeking new partnerships and alliances to distribute their products. This means an effective and holistic risk management framework across the entire business is more important than ever."
KPMG recently conducted a survey on the levels of awareness of ERM amongst mainland and Hong Kong-based insurers and found that they have an increased familiarity with ERM. According to the survey, 73 percent of respondents claimed to have an ERM programme, but one notable finding was that almost half of respondents (48 percent) did not have a clearly articulated statement of risk appetite.
According to Michael Lai, ASPAC ERM services leader in KPMG, "Understanding this appetite for risk and being able to communicate internal and external sources of risk is a key aspect of an ERM framework. It includes management of upside as well as downside risks, so it should be treated as a way to capture opportunity, as well as to guard against difficulties and losses."
The survey revealed that respondents are finely balanced in the factors influencing their ERM efforts with 26 per cent citing CIRC and other regulatory expectations, 26 per cent citing overall business complexity, 22 per cent shareholder considerations and a further 22 per cent maximising earnings and financial strength. The key areas for further work are risk appetite and tolerance (45 per cent), risk assessment (29 per cent), the risk management framework (13 per cent), and risk monitoring and reporting (13 per cent), which clearly shows that organisations are aware that ERM is a process of evolution.
"Regulators are increasingly focusing on ERM and the direction of progress is becoming quite clear," explains Mary Trussell. "This has been the case in the banking sector for several years since the introduction of Basel II. Those who start their ERM journey early will not only show a more favourable image of their company with the regulators, rating agencies and investors but may also have the opportunity to influence the shape of regulation in this area."
KPMG noted the strategies and approaches being taken by organisations across China differed markedly in their sophistication. A number of the respondents with responsibility for ERM did not have a direct reporting line to the board, leading KPMG to question whether risk management continues to be overlooked as a key factor in strategic planning. These differences seem to illustrate the fact that for many organisations ERM is a process of evolution.
"In Europe, the advent of key regulatory requirements such as Solvency II played a major role in further accelerating the sophistication of ERM, including the adoption of more sophisticated Economic Capital models," says Mary Trussell. "In the future, I think we could see regulatory drivers becoming more of a factor in our region as well."
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KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong and Macau, with more than 9,000 professionals.
This paper, featuring a survey of insurance executives based across mainland China and Hong Kong, looks at how Enterprise Risk Management (ERM) is ...