1602: Current Trends in Risk Management for 1602: Current Trends in Risk Management for Life Insurance CompaniesLife Insurance Companies

LOOKING BACK…focused on the futureLOOKING BACK…focused on the future

Adding Value Through Risk and Capital Adding Value Through Risk and Capital Management –Tillinghast SurveyManagement –Tillinghast Survey

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Hélène Pouliot

Towers Perrin

Adding Value Through Risk and Capital Adding Value Through Risk and Capital Management –Tillinghast SurveyManagement –Tillinghast Survey

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150 Chief Actuaries, CROs and CFOs from large insurance organizations around the world

Almost half from public stock organizations More than 2/3 are from life/health insurance

organizations 31% of respondents are from international

operations Respondents’ average revenues: US $4.73 B Respondents’ average assets: US $7.02 B

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Key findings:

1. ERM has come of age

2. ERM is ultimately about creating shareholder value

3. Economic Capital (EC) is a key tool that is on the fast track

4. Risk and EC management are already making a difference

5. We are not done yet

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1. ERM has come of age:

86% of respondents say ERM is more of a priority today than just a year ago

A strong shift in the line of authority and reporting relationship for the person responsible for risk has occurred over the past 2 years:

─ CRO more likely now to be primarily responsible for ERM─ CRO or other more likely to report up to CEO, a reversal from

our last survey when this role was likely to report to the CFO There has been a marked increase in the number of companies

that have cross-functional risk committees An increase in accountability is illustrated through the clear

delineation of roles and responsibilities for most risk management processes

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Responsible for riskmanagement

7%

1%

4%

9%

17%

23%

39%

Other

Internal Audit

Risk Management Director

Chief Actuary

Risk Management Committee

Chief Financial Officer (CFO)

Chief Risk Officer (CRO)

6%

1%

3%

13%

28%

49%

Other

Chief Actuary

COO

Board of Directors

CFO

CEO

To whom primarily reports

Adding Value Through Risk and Capital Adding Value Through Risk and Capital Management –Tillinghast SurveyManagement –Tillinghast Survey

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The presence of cross-functional risk management committees has increased dramatically

This is a marked increase from our last survey when only 38% on average had a cross-functional committee

Already have

cross-functional

committee

63%Considering

cross-functional

committee

17%

No plans for

implementing

cross-functional

committee

20%

Adding Value Through Risk and Capital Adding Value Through Risk and Capital Management –Tillinghast SurveyManagement –Tillinghast Survey

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2. ERM is ultimately about creating shareholder value

Insurers see the principal objectives for ERM as helping them create and improve shareholder value, make risk-based decisions and better use of capital

Risk and capital management tools are being increasingly used in key decision-making processes affecting shareholder value

Insurers are currently focusing their efforts on more basic processes:

─ Internal risk reporting process─ Measurement of insurance risks─ Risk identification and prioritization processes

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Risk reporting

The frequency of risk reporting is very low, given its importance

Most companies monitor compliance with internal risk guidelines and external risk guidelines

More than ¾ of respondents internally communicate key risk exposure and risk management activities via regular reports to their executive committee/board of directors

External communication is important for the majority of companies

─ More than ½ provide separate information to rating agencies

─ 41% have a separate section devoted to risk management in their annual report

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3. EC is a key tool that is on the fast track

EC is becoming an important tool for improving capital allocation and for use in risk-based decision-making

The methodology for calculating EC is still evolving The use of EC in NA appears to be focused on the regulatory

view of capital The most prevalent use of EC today is for communicating at

the company level with shareholders, rating agencies and regulators

Improvements are being planned by a majority of respondents:

─ North Americans are planning to extend their risk coverage in their EC models

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Calculating and using EC

Market risks are most often captured in EC calculations; operational risks least often

Statutory or regulatory liabilities are the most used definition of liabilities in EC calculations

A wide variety of measures of risk tolerance are used with significant differences by region with NA using Tail Value at Risk or CTE and Europe and Asia using Probability of Ruin

The period of risk assessment also varies widely: ─ In NA companies use the duration of the run-off of the

portfolio ─ In Asia & Europe they are more likely to use one year

External communication of EC is widespread

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4. Risk and economic capital management are already making a difference

Risk management considerations have already caused insurers to change business decisions in important parts of their business

The effects on business decisions are likely to increase with the widening use of risk and capital management tools in areas such as strategic planning, product design and product/business mix

Insurers are taking specific actions to optimize asset liability risk and return trade-offs

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5. We are not done yet

There is a gap between what insurers want from ERM and where they are currently focusing their efforts

There are differing bases for measuring the impact of risk as well as the metrics used too measure and quantify risks

While EC is emerging as a key tool, the methodology is still evolving

Insurers continue to show concerns about their ability to effectively implement ERM

Areas where insurers are least satisfied are with their ability to:─ Reflect risk in performance measures─ Aggregate risks across functions and businesses─ Quantify operational risks