Risk Management Control Cycle

• Risk management follows a control cycle comprising six steps.

Risk Management Control Cycle

• The cycle begins with identifying risks and potential controls.
• Followed by classifying risks and allocating risk owners.
• Risks are then measured, estimating frequency, severity, and volatility.
• Risk control involves finding ways to mitigate frequency and severity, selecting appropriate measures.
• Finance calculates necessary capital reserves.
• Regular monitoring reviews risks, assesses new risks, and ensures control effectiveness.

Risk Identification

• The hardest part of risk management is pinpointing risks.
• Involves brainstorming sessions and desktop analysis.

Risk Classification

• Grouping risks helps calculate the cost of risk and diversification value.

Risk Measurement

• Considers the probability of a risk and its likely severity.
• Expected costs and volatility are worked out with controls in place.
• Outcome dependency aids strategy selection, considering interdependencies.

Risk Control

• Aims to mitigate frequency or severity of risk, aligning with risk appetite.
• Deciding to reject, fully accept, or partially accept each risk.
• Risk control measures involve setting upper claim limits.
• Underwriting risks carefully, adjusting premiums as needed.
• Applying rigorous claims control and consulting experts.
• Using reinsurance.

Risk Monitoring

• Regular risk reviews ensure risks and risk appetite stay aligned.
• Reports detail risk management practices and improvements.
• Assumptions are revisited if not one-off.
• Part of quality assurance, reassessing risk importance, and reassessing with news.

Monitoring

• Regular review of risks (reassess and assess new risks).
• Review of control measures (are they effective).
• Comparing vs. Plan?
• Reassess if gain new information

Portfolio Effect/Hedge

• Life insurers selling whole life assurance contracts (mortality risk) and immediate annuity contracts (longevity risk).
• These risks offset each other.

Systematic vs. Diversifiable Risk

• Systematic risk impacts the entire market, whereas diversifiable risk arises from individual components and is eliminated by diversification.

Diversification

• Includes lines of business, age groups, sales channels, geographical areas, and reinsurance providers.
• Investment asset classes and territories.

Enterprise Risk Management (ERM)

• ERM considers risks across the whole enterprise.
• Involves consistent risk procedures and assessing risk relations.
• Benefits from diversifying or pooling risks between business units.
• ERM defines risk appetite and a set of standards from a central function.

ERM Benefits

• Diversification can cut capital requirements.
• Confidence in risk management leads to cheaper debts.
• Increased efficiency thanks to less duplication.
• Reduce operational risk thanks to group best practice.

Risk Identification - What to Determine

• Whether it is systematic or diversifiable.
• Risk control processes and opportunities to exploit risks for advantage.
• Aligning with orgainzations risk appetite or tolerance

Good Risk Management - SAMOSAS

• Stability of business
• Avoid surprises
• Management of capital
• Opportunities exploited
• Synergies identified
• Arbitrage indentified
• Stakeholder confidence

Good Risk Management - SAVIOURS

• Strategic decision making
• Avoid surprises
• Volatility of profits reduced
• Improved profits
• Opportunities exploited
• Understand interdependencies
• React quickly to emerging risks
• Stakeholders given confidence

Relevant Constraints

• Include political, social, regulatory, and competitive factors.

Exploitation

• Hedges and portfolio effects among risks.
• Financial and operational efficiencies within strategies.

Risk vs. Uncertainty

• Risk measurement.
• Uncertainty can't be modelled while Risk usually can

Stakeholders in Risk Governance

• Include employees, risk officers, managers, directors, customers, shareholders, regulators, advisors, and credit rating agencies.
• Internal = Directors/Senior management, Risk managers/CRO's & all other employees
• External = customers, S/H (through risk appetite), Credit rating agencies & Regulators (through min std of risk gov)

Employees/Managers

• All memebers of staff are stakeholders in RG and should follow RG framework
• Looking out for risks and suggesting mitigation.

Chief Risk Officer

• Allocates risk budget
• Monitirong groups risk.

Risk Managers/Directors

• Full use of risk budget
• Risk data collection
• Monitoring and reporting

Customers/Policyholders

• Report risks they find when using products.
• Rewarding such feedback may be necassary.

Shareholders/Owners

• Drive risk governance and influence through votes.

Regulators and Credit Rating Agencies

• Interested in risk governance quality; ensure enough capital is held, and products are suitable.

Advisors

• Contribution depends on their role.
• Should note and manage risks.

Risk Appetite

• Will depend on risk appetite of stakeholders identical risks could have different levels of capital.

Insurer Choices

• Insurers may chose to take on some risks, mitigate others (RI) and avoid/refuse to take on others

COMBEL - Risks

• Used to identify risks
• External, Liquidity, Market, Business

External Risk

• Non financial risk

Liquidity Risk

• Liquid assest or market
• Close to cash in nature eg a term deposit OR
• Can be converted to cash quickly and amount of cash it would become is almost certain eg gilt
• A liquid market is likely to be a large market with lots of ready participants

Business Risk

• UW, Insurance, Fianancing and exposure risk

Insurable Interest

• To distinguish from a awager

Crime

• Includes fraud, theft.

Project

• Time delays, budget overruns, bad design, poor planning.

Business

• Not as profitable as thought, compeition, lack of demand, operational problems.

Operational Risk

• Sponsor default, incorrect cashflow estimates.
• Mismatch of charges vs expenses.
• Brand

Risks to Consider

• Includes competitor actions, lack of interest in product, expenses greater than expected, increasing longevity, and poor policy wording.