Enterprise risk management optimizing business value to deliver growth

Insurance – Risk and Capital Transformation

There is an increasing demand for risk functions to demonstrate how they add value to the business beyond compliance, with many insurers now turning to their existing risk management teams and asking: how can we best optimize output to ensure value-enhancing performance?

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Global Head of Insurance

KPMG in the UK


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Efforts by insurers across Europe and other jurisdictions to comply with Solvency ll have led to the development of enhanced risk and capital frameworks, and a greater understanding of business risks.

61% of financial service firms said risk management is essential for adding value to their business.

Source: KPMG International 2013

However, the focus in may territories has been about regulatory compliance only. The delays to Solvency II now provides insurers the opportunity to step back and think about what they are deploying and assess how they can fully embed risk management within the business while also gaining commercial value.

Describing how risk management optimizes business value and helps deliver growth is now a priority.

This fundamental shift in expectations requires risk management to be viewed through a new lens. Applying an insightful risk value equation, insurers can make a positive contribution to the risk adjusted rate of return on capital (RAROC); develop a common language for communicating the value; and develop a set of consistent measures of performance across the business.

Enhancing risk management to help deliver value, five levers:

  • Risk target operating model and framework, together, when embedded into the day-to-day management of business and financial risk will allow the risk function to take a strategic view of risk across the business.
  • Governance and people arrangements, articulate the primary functions and interrelationships of the CFO, Chief Actuary and CRO in a way that reflects their increased interdependency, and the convergence of risk and finance. A clearly defined risk function at the business level, with well mandated terms of reference and the capabilities and empowerment to affect change is key.
  • Integrated risk and capital management processes should identify opportunities as well as threats - allowing insurers to take risk at a lower cost (capital and revenue) than its competitors and so generate growth.
  • Risk, actuarial and accounting systems and technology, when compatible with each other, provide an integrated way for economic capital, solvency and other outputs critical to business decision-making to be revealed.
  • Reporting mechanisms should be based on a clear understanding of stakeholder requirements regarding critical data and analytics. Consistency should provide greater transparency to, and confidence from, key stakeholders allowing for a more accurate evaluation of the business by the market.

Potential benefits for insurers

  • The risk to the business strategy/business model is understood by the Board and Executive team
  • The known operational and financial risk that the business is exposed to are identified, monitored, managed and reported on
  • The impact of the different risks on a wide range of metrics are understood – cash, profit, capital, value, franchise
  • Embeds a culture of risk management into the day-to-day business processes
  • Fosters a culture that enables established norms to be recognized and challenged
  • Reputational risk is recognized

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