Geneva Association/International Insurance Society Research Presentation, Chicago Enterprise Risk Management in the Insurance Industry Madhusudan Acharyya University of Southampton United Kingdom Centre For Risk Research

2 Agenda Research methodology and data Results (under five dimensions) of the research Understanding of ERM Motivation of ERM Design of ERM Challenges of ERM Performance of ERM Contribution of the research and policy implication issues

3 Understanding of ERM ERM as an concept To manage all risks holistically and bringing a balance in all risk and management initiatives Focus on risk and its categories Focus on the organisation ERM as a process Focus on Risk Identification and Planning Modelling and Measurement Implementation Monitoring Focus on the organisation Harmonisation Standardization Integration Centralization Focus on the organisation Focus on risk ERM as a concept ERM as a process

4 Understanding of ERM (Cont’d) Insurance Risk Management Financial Risk Management Audit Risk Management Business Continuity Management Insurance Risk Management Financial Risk Management Operational Risk Management Core Business Risk Management Strategic Risk Management Enterprise Risk Management Focus is more on the downside risk and to survive from unpleasant surprises (either pre or post situation) Focus is more on to increase the efficiency and growth of the organization (in terms of profitability and value adding) Focus is more on capturing opportunities in the face of risk whilst protecting downside (both pre and post loss situation) Protection the reputation (corporate image/brand) and achieving social recognition Specific General Economic responsibilities Legal responsibilities Ethical responsibilities Discretionary responsibilities Bottom Level Top Level

5 Motivation of ERM Leadership of CEO Market pressure Size of the organisation Regulations

6 Design of ERM Shareholder Value Model Economic Capital Risk Governance Model Controlling Risk Reporting Model Transparency

7 Shareholder Value Model Large Risks (Including emerging risks) Filter Risk Landscape Rader Screen 2 Modelling Risks 1. Major Risks - Statistical Models - Threat Scenario 2. Dependencies - Normal Situation - Stress Situations New Correlations Economic Capital Culture Financial Strength Market Environment Expertise Regulatory Framework Past Experience Customer Return Target Total Acceptable Risk Rader Screen 3 Economic Balance Sheet Shareholder Value Model Risk Governance Model Risk Reporting Model Equity Risk Market Risk Insurance Risks Risk Transfer (or Finance) Reinsurance Securitisation (ILS, Swap) Geographically Diversified Portfolio 99% 99.5% Rating Agency Regulators EV 99% VaR 99% TVaR All Risks (Whatever the type and source) Financial Market, Insurance, Credit, and Operational Filter Quantifiable & Unquantifiable Quantifiable Rader Screen 1 Risk Appetite Shareholders Market Consistent Value of in- force liabilities [Y] Market Value of Assets [X] Available Capital [X-Y] Probability distribution of P&L Structure of ERM

8 Risk Governance Model Group Board Group CEO Group Management Board Local Management Boards Country/Regional CEOs Division /Business Units CROs Country/Regional Risk Managers Local Risk Committees Heads of Divisions/Business Units 1 st Line of Defence [Management] Setting strategy, performance measurement, establishment and maintenance of internal control and risk management in the business Group Risk Committee Group CRO Market & Credit Investment Risk Insurance Risk Operational Risk Strategic Risk Business Continuity CFO, CUO Chief Actuary etc Other Committees Group Audit & Compliance Committee Group Chief Auditor Country/Regional Internal Auditors 2 nd Line of Defence [Risk Assessment] Formal Risk Management Framework 3 rd Line of Defence [Independent Assurance] Providing independent and objective assurance of the effectiveness of Group’s risk management systems and internal control developed and implemented by1 st and 2 nd lines of defences

9 Challenges of ERM Operational Challenges Risk Landscape (or Profile) Risk Communication and Culture A Common Risk Language Lack of Trust Technical Challenges Risk Modelling and Measurement Correlations and Diversification Benefits

10 Performance of ERM Tangible and Intangible Benefits Shareholder Value Stakeholder Satisfaction Reputation Ex-ante and Ex-post R&D

11 Contributions and Policy Implication Issues Understanding of ERM Who and Whom Motivation of ERM Role of Organisation versus other Stakeholders (regulators, rating agencies, professional institutions/firms) Design of ERM Several Standards of ERM Challenges of ERM A unique risk and capital model in broader sense Performance of ERM Big pictures Value creation for stakeholders Theory of ERM A set of theories [multidisciplinary]

12 Conclusion Research Methodology Results Contributions