RISK MANAGEMENT FOR INSURERS IN ISRAEL

A Regulatory Perspective

Perspective of the Insurance Commission

• What we are encouraging

• New Regulation – description and intent

Background

• Life and non-life: composite companies

• Pension: risks borne by plan members

• Risks increasing or changing

Policyholder Liabilities

• Traditional Balance Sheet: one outcome

• Risk Management: universe of outcomes

• Probability and severity of each outcome

• Assets

• Asset-Liability Management

Before 2005

• No appointed actuary system

• No required risk management function

2005 Legislation

Chief Risk Officer for each:• Insurance company

• Pension plan management company

• Pension plan

2005 Legislation

• Chief Risk Officer: – Person not “function”

– No administrative responsibility– Advisory responsibility

2006 Circular

• Responsibilities: chief risk officer

• Support: actuaries, investment and reinsurance officers

• Risks: underwriting, market price, credit

• Stepping stone: enterprise risk management

Chief Risk Officer – Responsibilities

• Identify significant risks

• Evaluate monitoring and controls

• Evaluate preparedness for extreme events

• Quantify risk exposure

• Estimate economic capital

Economic Capital

• December 31 2009

• Correlations not required but encouraged

• Better understanding of risks

• Role in determining regulatory capital

Economic Capital

• Capital relief:– Company data and research

– Effective monitoring and controls

Economic Capital

• Guidance:– A Global Framework for Insurer

Solvency Assessment (IAA)

– Quantitative Impact Study 2 – Technical Specifications (CEIOPS)

Chief Risk Officer – Responsibilities

• Immediate Reports:– Inadequate monitoring and controls

– Hazardous situation requiring correction

• Annual (Quarterly) reports

• Separately: risks for policyholders

Chief Risk Officer – Support

• Right to receive any information

• Annual (quarterly) reports:– Appointed actuaries

– Chief investment officer

– Reinsurance officers

Chief Risk Officer – Support

• Internal auditor – Independence– Work plan to include risk monitoring and

controls

2006 Circular – Implementation

• Deadlines in stages over three years• Implementation plan for each company

Encouraging Effective Risk Management

• Circular: no reporting to Commissioner • Chief Risk Officer:

– under CEO or senior manager– CEO and investment officers not eligible

Encouraging Effective Risk Management

• Risk management culture• Prerequisite for capital relief• Executive compensation

Encouraging Effective Risk Management

• Capital relief– New regime linked to Solvency 2

• Executive compensation – Draft regulations: Boards of Directors

Effective Risk Management –Board of Directors

• High-level policy:– Exposure of company and policyholders

to risk– Reinsurance– Data security

Effective Risk Management –Board of Directors

• Approve risk controls• Set exposure limits:

– individual risk categories– all risk categories combined

• Examine capital adequacy

Regulatory Emphasis: Strengthen Internal Risk Controls