The insurance CRO agenda

Today’s insurers face a perfect storm in maintaining financial and operational resilience post-Covid, easing pressure on the balance sheet in a low interest rate environment, and managing the uncertainty of a growing roster of financial and non-financial risks. Here our expert panel shares its views on climate change, cyber risk, digitalisation and compliance, and key regulatory developments, offering a compelling insight on the challenges and priorities shaping the insurance chief risk officer (CRO) agenda.

The Panel

• Paul Buchner, Head of Group Risk Management, UNIQA Insurance Group
• Christophe Burckbuchler, Managing Director, Moody’s Analytics
• Sid Medappa, Chief Risk Officer, Zurich Insurance plc
• Nick Silitch, Chief Risk Officer, Prudential Financial

What do you see as the key challenges and priorities for insurers in 2021?

Nick Silitch, Prudential Financial: The biggest challenge is the continued evolution of the industry, which makes rational competition for asset-driven liability business difficult and risks potentially destabilising to policyholders’ outcomes in a crisis. This makes prudent asset/liability management (ALM) and capital strength a top priority for insurers like Prudential. 

Sid Medappa, Zurich Insurance plc: The key challenges in the property and casualty (P&C) insurance sector in 2021 are, in effect, a continuation of the global impact of Covid-19. Since the onset of the pandemic in February/March 2020, we were immediately faced with ensuring our business remained operationally resilient, staff remained healthy and motivated, and we remained well positioned to manage our customers, partners, regulators and industry bodies in a virtual environment. 

Those challenges remain and our priorities in 2021 as a result are an extension of 2020, wherein we continue to focus on the key areas of financial resilience, speed of digital transformation, inflationary trends, operational resilience including third-party risk management, and people – as in ways of working in a post-Covid environment.   

Paul Buchner, UNIQA Insurance Group: As we are still in the midst of the Covid-19 crisis, a strong focus will remain on managing its implications. One of the challenges is to keep the risk culture of our organisation at a high level while many people are working remotely. An additional focus for us is to understand and proactively prepare for the mid- to long-term consequences of the crisis.

A further top priority for this year will be on managing the non-financial risks, such as cyber, technology and compliance risk. Besides the classical financial risks, we currently observe a strong push towards digitalisation and use of cloud services. This topic therefore needs attention from the risk function.

Additional priorities and challenges for us in 2021 are the ongoing regulatory developments (mostly the review of the Solvency II regime as well as the regulations on sustainable finance), as well as a stiffening of the 'war for talent', since the management of these topics requires skilled personnel. 

Christophe Burckbuchler, Moody’s Analytics

Christophe Burckbuchler, Moody’s Analytics: It is fair to say that the pervasive impacts of Covid-19 and climate change have been and will remain major challenges for the industry in 2021.

As a consequence of these volatile environments, many insurers are monitoring and managing their real-time financial positions to help them navigate the pandemic and its economic effects. 

Other issues with long-term impacts, such as climate change, are also high on the agenda and will require insurers to gain better insights on their global risk exposures. 

Unrelated to the pandemic, some regulatory challenges remain as insurers must also manage the accounting changes demanded by International Financial Reporting Standards (IFRS) 17 and IFRS 9. This remains a focus as they plan for parallel runs in 2022 and prepare for the IFRS 17 2023 deadline. 

In parallel, we are observing an acceleration around digital transformation, reflecting the impact of remote work as well as that of wider changes along the value chain of insurance companies. So, beyond the distribution of insurance products that are moving to the digital world, we are also seeing insurers leveraging the benefits of cloud technologies for their accounting and actuarial modelling, especially for intensive calculations. 

 

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How has Covid-19 changed the way insurers think about risk? What changes have you made because of the pandemic?

Paul Buchner: One lesson from the Covid-19 crisis was that low-frequency/high-impact events can indeed happen. In our risk models such events occur only in extreme scenarios, and – as a consequence of the Covid-19 outbreak – we are reviewing our assessments here.

One additional crucial aspect is the new remote working environment, as this has increased exposure to cyber risk. It was therefore important for us to improve the resilience of our IT assets to ensure stable systems. In order to take into account the new vulnerabilities, we have performed a thorough assessment of our systems to identify and strengthen the most critical assets. Additionally, information campaigns have been performed in our organisation to raise awareness of new vulnerabilities (phishing, for example).

Nick Silitch: The world was changing rapidly even before Covid-19, as digital distribution and infrastructure increasingly drove business evolution. Covid-19 has only accelerated these trends on many fronts. We try to ensure this transformation remains central when determining which risks to take and which ones to mitigate. We also try to ensure the risk organisation is doing all it can to keep the heightened level of inherent risk under control. The goal is to manage these risks with proper control and mitigation while keeping residual risk within an acceptable range.

Sid Medappa, Zurich Insurance

Sid Medappa: Covid-19 has reinforced the importance of assessing the interconnectedness and global nature of businesses and the risk implications thereof. Pandemic risk has been on the risk radar for the past few years, and we in the risk community have discussed scenarios to understand the potential financial and operational impacts. However, Covid-19 highlighted the elements that can sometimes be overlooked during a stress-testing exercise or in scenarios, namely interconnectedness, speed of onset and the prolonged nature of the risk. 

Nearly all companies had to move to a home working environment in the space of a few days; financial markets were impacted globally and the third parties we relied on were equally affected and had to adapt. In most circumstances, such scenarios have a local focus and don't always consider cross-border implications. The vaccine roll-out has not been effective in certain jurisdictions, which has delayed economic recovery even further. 

Covid-19 also reinforced what an 'adverse but plausible scenario’ looked like in real life, and it has led to better discussions with the business. In the past, a global or regional situation such as this would have been dismissed as ‘too adverse and not plausible’. The need to manage risks and controls by looking at the end-to-end process and not performing business resilience exercises in silos were other timely reminders. In addition, it underlined the importance of the own risk and solvency assessment (Orsa) as a dynamic process (especially stress-testing) and not just an annual exercise.  

Christophe Burckbuchler: This year, insurers continue to grapple with the questions and challenges in response to the pandemic. They have had to prepare for financial market shocks and the uncertainty of their future impact. They have had to understand the drivers behind the changing dynamic in their business and define strategies to respond to the situation. For many, capital and solvency ratios have become volatile and we have observed insurers tracking and managing risks and financial positions more frequently, which required they have the access to adequate tools to evaluate different strategies under various sets of assumptions to support better and faster decision-making.

 

Climate change is a critical issue for insurers but are regulators moving fast enough on this issue? How are insurers managing the new risks and what impact do they have on their organisations?  

Sid Medappa: Regulators have started to place greater focus on this topic in the past year. Recent examples are the European Insurance and Occupational Pensions Authority (EIOPA) consultation paper on the use of climate change scenarios in the Orsa, the UK Prudential Regulation Authority (PRA) pushing towards better management of climate-related financial risks, and the Monetary Authority of Singapore issuing guidelines on environmental risk management for banks. 

Zurich Insurance Group’s commitment to sustainability – including managing the risks posed by climate change – continues to be an integral part of our risk management approach. Climate change is the most complex risk facing our society today: it is intergenerational, international and interdependent. Zurich’s approach to managing climate risk is rooted in its multidisciplinary group-wide risk management process, and we promote best practices by managing the interconnectedness of environmental, social and governance (ESG) risks, and engaging with customers and investees. 

Paul Buchner: Climate change should be high on the agenda of the risk function in insurance companies this year as numerous regulations in the context of the sustainable finance initiative come into force. At UNIQA we are managing this risk in several ways. First, by introducing dedicated functions to corporate social responsibility (CSR) topics in the broad context, but also for risk management of natural catastrophes. 

To successfully manage climate change risk, it is important to raise awareness within the organisation as many different functions need to contribute. This is especially true with regard to measuring and qualifying the impact of climate change on our organisation. 

Nick Silitch, Prudential Financial

Nick Silitch: Climate change isn’t a new risk – it’s a risk we’ve been living with since the onset of the industrial revolution. What is perhaps new about climate change as a risk factor is that we’re approaching a critical tipping point in our journey that has made it impossible to ignore. As a result, all stakeholders – policyholders, employees, investors, ratings agencies and regulators – are paying increased attention to business models and the environment. While this trend varies in intensity by region, it’s certainly an issue at the forefront of the developed world.

What has been missing is a cohesive global approach to policy-making, which will set the world on a predictable path towards sustainability over a 30-year timeframe. While this will make a journey to sustainability more volatile, it doesn’t prohibit substantive progress from broad stakeholder groups such as regulators, investors, employees and management.

We continue to be focused on issues related to climate change. Not only are these issues relevant to outcomes for the insurance industry in general, but they will also have profound effects on the future of business models in which we invest.

Christophe Burckbuchler: Insurers and regulators are increasingly focused on understanding financial resilience in the context of potential climate pathways, and the physical and transition risks that different scenarios entail. 

Climate change, climate risk and related uncertainty will continue to be a growing concern for insurers this year. Globally, many are focusing on integrating climate risk into their risk modelling and embedding it into their strategic asset allocation decisions, typically by using climate scenarios. The Bank of England will launch detailed climate stress tests for all insurers and banks in June 2021. Therefore, insurers will need to prioritise climate risk modelling by committing significant resources and investment.

 

Given the intense pressure on the balance sheet due to ultra-low interest rates and ongoing market volatility, what tactics remain open to insurers in terms of ALM? 

Sid Medappa: Ultra-low interest rates have been around for a while, and this has been the ‘new normal’ for most insurers. This environment has placed pressure on the bottom line of insurers but has also continually highlighted the need for strong underwriting discipline and a clearly defined underwriting appetite. In relation to tactics remaining open to insurers – especially in times of ongoing market uncertainty – I would say this comes down to the risk appetite of the respective insurers. As the macroeconomic environment continues to place downward pressure on financial markets and impact economic growth, tactical options remain limited in the foreseeable future unless there is a higher tolerance to take on riskier investments. 

A potential return to higher levels of inflation is another key consideration. Furthermore, the market volatility experienced during Covid-19 has required well-considered risk/reward decisions by chief investment officers before making any changes to ALM strategies.

Paul Buchner, UNIQA Insurance Group

Paul Buchner: With interest rates at a historic low for some time now, our focus in past years was to have a deep understanding of our products and the corresponding features and to ensure our investment strategy was aligned accordingly. We expect this low interest rate environment to continue and are observing the implications of the Covid-19 outbreak on market conditions. Consequently, it is important for us to have a regular review cycle of the investment strategy and, if needed, adapt it based on economic developments and on our risk strategy. One topic usually on our agenda is the question of how liquid our investments need to be, since investing in less liquid assets (such as bonds with higher maturities) might result in higher yields due to illiquidity premiums and, additionally, it supports asset and liability matching.

Christophe Burckbuchler: Persistent low interest rates have increasingly driven the search for higher yields. In terms of actuarial systems and solutions, we see an increasing need for firms to improve their current ALM capabilities to optimise their asset allocations. This need is further underlined by regulators asking insurers to use investment returns in their actuarial projections that accurately reflect underlying assets, particularly for insurance products with minimum guarantees. This creates challenges for the establishment and management of insurers’ investment strategies, including understanding the impact of investment strategies on regulatory capital requirements, identifying new investment strategies to enhance yield, accessing alternative or illiquid assets, embedding real-world stochastic simulations, and designing a framework for more integrated modelling of assets and liabilities.

 

What ‘known unknown’ risks do you expect insurers to face in a ‘lower for longer’ environment? Which are you most worried about and proactively managing?

Nick Silitch: Long-duration insurers have always dealt with pressure from low rates on their business models. While insurers may face increasing pressure on earnings over time, those that run comprehensive stress-testing regimes will find themselves well prepared – especially regarding balancing risk against resources – to ensure sustainability over the long term.

Paul Buchner: Reinvestment risk is especially relevant for life insurance companies with a significant amount of fixed income investments in a lower-for-longer environment. A significant amount of the fixed income portfolio might currently provide high coupons, and redemptions from matured bonds might need to be reinvested at lower rates with corresponding implications on profitability. This is a topic that should be addressed and proactively managed.

Sid Medappa: The risks that come to mind are cyber, climate and geopolitical risk. 

The P&C industry has made good progress in understanding its IT risk posture. However, with growing levels of digitalisation, hybrid working models and interconnected business processes, the threat surface and attack vectors also continue to grow. As a result, we need to continuously review our IT footprint and adapt our controls to manage this existential risk.  

Climate risk remains high on the radar for the P&C industry as demonstrated by the increasing number of climate risk-related extreme weather events over the past few years. This has an impact on the physical and transitional risks across the industry. A clear commitment to sustainability and managing the interconnectedness of ESG risks is key in managing this risk. 

Geopolitical risk is also on the rise, which could increase the cost of doing business, deter global initiatives and disrupt supply chains, reducing the potential for diversity of thought/skills, products and services. A clear understanding of the end-to-end business model supported by well-executed strategies and robust contingency plans is a key factor in managing this risk.

Analysing the insurance sector

Moody’s Analytics offers a dedicated suite of products and services to support the insurance community
 

IFRS 17 and IFRS 9

Moody’s Analytics offers technology solutions to implement quickly and accurately, and carries out dry runs in preparation for the 2023 IFRS 17 deadline. Insurers can:

• Benefit from ‘vendor-maintained’ software approaches and cloud technology for IFRS 17 and actuarial modelling with effective risk controls for cloud data
• Industry-leading solutions for IFRS 9, including an end-to-end framework to allow for an efficient process for allowance calculations.

Climate risk

Moody’s Analytics has capabilities in economic forecasting, combined with expertise in climate science, modelling and financial projections to help insurers consider scenarios to assess the impact of climate risk. Insurers can:

• Use Moody’s Analytics Climate Pathway Scenarios and stress-testing framework to support their climate change scenarios  
• Get help developing scenario analyses to support their Orsa process

Risk strategies

Moody’s Analytics offers access to data and analysis to support risk strategies. Insurers can: 

• Make more informed investment decisions through Moody’s Analytics firm-level data, combining views on credit risk with ESG
• Use the RiskIntegrity^TM Suite to support investment and ALM teams with liability-aware asset strategy
• Track and manage their solvency position frequently and accurately to make better investment decisions around risk capital management using the SolvencyWatch^TM solution.

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