1. Financial Risks David Wong Friday 21 May 2004, Staple Inn Hall wp c

2. wp c Financial Risks  Concept of Financial Risks in General Insurance  Types of Risks  Managing Risks  Where are we today?

3. wp c What are Financial Risks? Financial Risks

4. wp c Financial Risk and Capital  Different insurers have different levels of risk  Insurer’s risk profiles change over time  The insurer’s capital requirement will depend on it’s risk tolerance/appetite Risk Capital

5. wp c Risk and Capital: Financial Risk Universe of Risks Controls Quantifiable Risks Qualitative Risks (capital value) Qualitative Risks (no capital value) Capital Model Add-Ons

6. wp c Drivers: Increased Focus on Risk  Regulatory  CP190 for Insurers, CP04/7 for Lloyd’s  Capital Management Improvements  Competitive Advantage  Turning Risk into Value

7. wp c Types of Risks Credit risk Market risk Insurance risk Group risk Liquidity risk Operational risk

8. wp c Reasons for Insurer Failures Source: FSA Occasional Paper 20 “Managing Risk: Practical lessons from recent “failures” of EU insurers”

9. wp c Managing Risks: Risk Management Framework Strategy  Direction and objectives Direction and objectives  Culture and language Culture and language  Risk policy and definition Risk policy and definition  Capital allocation Capital allocation Processes  Risk identification Risk identification  Risk assessment Risk assessment  Risk response Risk response  Risk monitoring / reporting Risk monitoring / reporting  Capital modelling / allocation Capital modelling / allocation Organisation Structure Organisation Structure  Departments / Committees Departments / Committees  Reporting lines Reporting lines  Roles and responsibilities Roles and responsibilities  Skills and resources Skills and resources Infrastructure  Methodologies Methodologies  Technology / systems Technology / systems  Management information Management information

10. wp c Risk Management – Who is involved? Partial Involvement Tax Sales & Marketing ITAccounting Risk Management Core Involvement Board & Senior Management Underwriters/ Account Managers Reinsurance Finance Treasury ClaimsActuaries External Parties ConsultantsFSA Rating Agencies Reinsurers

11. wp c Managing Risks: Key Steps Enterprise Risk Management Risk Register Risk Assessment Risk Based Capital Management Information Risk Monitoring Management Buy-in Risk Profile Risk Appetite

12. wp c Managing Risks: Key Steps Enterprise Risk Management Risk Register Risk Assessment Risk Based Capital Management Information Risk Monitoring Management Buy-in Risk Profile Risk Appetite

13. wp c Articulating risk appetite Quantitative measures Probability of Ruin Credit rating Target return on capital 8 Qualitative measures Core competencies Activities to be excluded or avoided Level of new business activities Zero tolerance Regulatory mis-compliance

14. wp c Risk Registers  Identification of risks  Initial view of relative significance to the company  Input to stress & scenario testing/DFA/ICA Risk TypeDescription Probability/ Severity Controls & Mitigants Action Market Risk Fall in Equity Market Med Probability High Severity Med Controls: Investment Policy Model using S&S

15. wp c Risk Registers - Issues  Capturing risks not issues  Operational not operations risks  Categorisation  Consistency  Assessment of controls

16. wp c Risk Based Capital: ICA Internal Capital Assessment Insurance Risk Market Risk Credit Risk Operational Risk Liquidity Risk Group Risk Planning & Insurance Model Capital requirement for Insurance, Market and Credit risks Estimate correlations between risk areas and determine aggregate capital requirement Consider Definition Loss history Systems & controls Consider Marketability of assets Maximum cash outflow Contingency plans Consider Capital structure Contagion risk

17. wp c Management Information  Key Performance Indicators  Solvency Margin  Key Risk Indicators  Risk and Solvency Scorecard  Trigger Events Report

18. wp c Where are we today?  PwC Enterprise-wide Risk Management for he Insurance Industry  UK Insurers

19. wp c Financial Risks – Key Messages  Key area of focus  Framework to embed risk and capital management in the organisation  Opportunity rather than threat