Developing An Effective Risk Management Framework for an Insurance Company

Abstract

This research focuses on the development of an effective risk management framework for an insurance company. The emerging regulations namely Solvency II in Europe and Solvency Assessment and Management (SAM) in South Africa are being produced with the objective of ensuring that the policyholders and beneficiaries of insurance companies have adequate protection. The European regulators have produced the Solvency II directive setting out the principles that insurance companies should follow. As such the development of an effective risk management framework for an insurance company is the heart and core of these regulations. The researcher sent a questionnaire to the respondents to obtain their input and practical insights to the outcome of the literature review. The views of the respondents brought into consideration the practicalities associated with implementing risk management frameworks. The respondents all brought their wide and diverse experience and skills and critiqued the outcomes of the literature review to a greater degree of detail. This process has led to a more robust conclusion on the effective risk management framework for an insurance company. The researcher sent the research questionnaire to stakeholders that included people working in the following categories: Chief Executive Officer, Financial Director, Chief Risk Officer, Compliance Officer, Partners at Audit, Consulting and Advisory firms and Rating Agencies. The respondents were chosen from England and South Africa, with an appropriate representation across each of these categories. The targeted respondents have all responded and each of these stakeholder groups operates from different perspectives on a daily basis. As a result, this mix provides appropriate coverage and balance, and thus the outcomes of this research have been tested robustly. The conclusion of the research is that the risk management framework as identified in the literature review is applicable The components of an effective risk management framework for an insurance company comprise the following elements: Strategic (risk vision, objectives, strategy, appetite, tolerance limits, business strategy); Governance (policy, governance framework and capital integration); Operational (organisation, culture, processes, inputs (data, models, methodology)) and Economic (cost benefit analysis, measuring value of risk management and performance measurement). These conclusions are consistent with the emerging regulations under Solvency II in Europe and SAM in South Africa. Given that the emerging regulations are set at a principles level, the research provides some useful and detailed insights into the considerations as well as some of the challenges associated with implementing risk management frameworks in an insurance company. The key message from the research has been that there is a lot of detail that should be considered when developing an effective risk management framework for an insurance company. The main focus areas have been identified to be: defining the risk appetite, setting the risk strategy, defining the tolerance limits, organisation, culture, processes, inputs (data, models, methodologies), implementation and ensuring that insurance companies derive value from implementing a risk management framework.