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  • Risk Management Practices of the Hong Kong

    Insurance Industry Survey 2011

    The Actuarial Society of Hong Kong

    Investment & Risk Management Committee, ASHK

    26 June 2012

  • 2

    1st industry wide survey conducted in 2008 during the crisis, covering

    a comprehensive scope. Companies demonstrated an increasing

    importance towards risk management concept while were still finding

    their ways through new approaches.

    2 years since then with SII introduced and August 2011 US

    downgrade plus European debt issues have aroused another new

    situation which is often said to be worse than 2008. 2nd survey to be

    conducted on similar questions and more specific scopes.

    Lets see where the industry is at now

    Background

  • 3

    Part 1: Risk Management Overview

    Part 2 : Regulatory Impact

    Part 4 : Interest Rate and Equity Risk, the latest crisis

    Part 5 : Currency Risk

    Part 6 : Stress testing and overall Wrap Up

    Part 3 : Capital Risk

    Table of Content

  • 4

    Setting the sceneusing 30/9/2011 data

    21 companies participated in the survey.

    Local offices 13 (62%), Regional offices 8 (38%)

    Approach

    Accountability

    CRO 75%

    Chief Actuary 15%

    No explicit owner 5%

    Others 5% (legal)

    Europe

    61%

  • 5

    Asset and liability positions (local offices only)

    (rounded to the nearest %) 2011 2009

    Corporate bond 49% 62%

    Government bond 23% 11%

    Equities (and fund) 10% 11%

    Cash / money market 14% 9%

    Mortgage / ABS 2% 2%

    Policy loans 1% 2%

    Real estate 0% 1%

    Hedge funds 0% 0%

    Others * 1% 2%

    Asset class holding Product portfolio

    * Other loans and account receivables

  • 6

    Key risks to company

    Respondents asked to rank 1st to 3rd (1st scores 3, 2nd scores 2, 3rd scores 1)

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    Interest rate Equity Credit Liquidity Operational Reputation Capital vol /

    level

    Regulatory Others

    One year ago

    Current

    Currency, insurance risks

  • 7

    Risk management program - Drivers

    Respondents asked to rank 1st to 3rd (1st scores 3, 2nd scores 2, 3rd scores 1)

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    Head office

    requirements

    Good business

    practice

    Regulations GFC impact Shareholders'

    need

    Rating agency Manage

    complex risk

    exposures

    Competitive

    advantage

    One year ago Current

  • 8

    Risk management program - Challenges

    Respondents asked to rank 1st to 3rd (1st scores 3, 2nd scores 2, 3rd scores 1)

    0

    5

    10

    15

    20

    25

    30

    35

    Talent shortage Buy-in from

    cross functions

    Lack of industry

    best practice

    Software /

    systems

    Speed of

    implementation

    Quality of

    internal data

    Lack of support

    from the top

    Budget approval Others

    One year ago Current

    Time constraints and changing regulations

  • 9

    Satisfactory level to internal capabilities

    Risk management components: Most Least

    Framework and governance structure

    Definition of risk appetites and risk limits

    Risk indicators and identification

    Risk measurement and quantification

    Internal / external risk reporting and disclosure

    Internal education and communication of risk policies

    Linking senior management remuneration to risk performance

  • 10

    Alignment of Risk to Strategy

    No explicit alignment

    1. ERM forms part of strategic planning

    2. Integration of risk appetite into business decision process

    Closely integrated

  • 11

    Part 1: Risk Management Overview

    Part 2 : Regulatory Impact

    Part 4 : Interest Rate and Equity Risk, the latest crisis

    Part 5 : Currency Risk

    Part 6 : Stress testing and overall Wrap Up

    Part 3 : Capital Risk

    Table of Content

  • 12

    Concerns over regulatory risks

    Move up in risk priority No change Less important

    60% 35% 5%

    Areas of regulatory changes in concern, in order (tick all apply): Most important

    1. Local country regulations capital requirements43%

    2. Local country regulations reserving methodology

    3. Local regulators communication / transparency / structure

    4. Capital volatility imposed by economic balance sheet50%

    5. Capital level required by Solvency II

    6. Overall tighter scrutiny on distribution, marketing, disclosure 7%

    7. Treatment of residual margin and discount rate with IFRS

  • 13

    What are the concerns over regulatory risks?

    0

    2

    4

    6

    8

    10

    12

    14

    16

    18

    20

    Inhouse talent

    shortage

    Uncertainty makes

    planning difficult

    Pace of change is

    distracting

    Model risks related to

    new rules

    Impact on profitability

    and competitiveness

    Heavy costs of

    implementation

    One year ago Current

    Tick all that apply sum of responses

  • 14

    Views on Solvency II

    European Companies Non Solvency II Practitioners

    Top 3 challenges to Solvency II implementation to date

    1. Build capacity and flexibility to cope with potential surprises from further guidance

    2. Devise detail action plans to define key stakeholders role, work flow and procedures

    3. Develop adequate subject matter resources

  • 15

    Part 1: Risk Management Overview

    Part 2 : Regulatory Impact

    Part 4 : Interest Rate and Equity Risk, the latest crisis

    Part 5 : Currency Risk

    Part 6 : Stress testing and overall Wrap Up

    Part 3 : Capital Risk

    Table of Content

  • 16

    Capital measures what is everyone using now?

    Others include Local, ICA, S&P

    Majority using at least 2 capital measures.

    Most popular combination -Solvency I & RBC/EC.

  • 17

    Capital measures what is everyone thinking now?

    Rank importance (1-3)

  • 18

    Capital measures what is everyone thinking in 5 years time?

    Rank importance (1-3)

  • 19

    Capital calculation RBC / EC / Solvency II SCR

    Measures Key survey results

    Implementation 50% with 5+ years

    Frequency 73% with Quarterly

    Time horizon 86% with 1 year

    VaR or CTE 75% with VaR alone

    Satisfaction level (1 = Not at all and 5 = Very)

    53% with 3; 33% with either 4 or 5

  • 20

    Capital calculation Benefits

    Provides uniform, clear, comparableand transparentquantification and presentation of different type of risks

    Allows risk management to be embedded in the

    business decision process

    Risk-based and under economic basis regardless of accounting rules

    Allows easier communication with senior management

    Transparency of risks as the measures set out explicitly the capital requirement for the various risks considered. This provides management with a better view of the key risks.

    RBC / EC / Solvency II SCR

    RBC / EC / Solvency II SCR

  • 21

    Capital calculation Weakness

    Lack full understanding and adoption of the measure

    RBC / EC / Solvency II SCR

    RBC / EC / Solvency II SCR

    Resource constraint

    May contradict the result under accounting basis

    Lacking credible calibration of the required shocks to use (due to lack of

    data, various possible calibration approaches, etc)

    Reliance on historical data to estimate parameters for probability distributions, and

    that the model distribution may not fit reality

    Large risk charge on equities, and overly complicatedmethodology which makes it difficult to understand changes and extremely difficult to communicate and explain to management

    Correlation is subjective

  • 22

    Capital regime and reserving basis

    Q1: Do you consider a need to review the reserving basis if HK is to move to RBC

    regime?

    Q2: What is your view on when, if ever, Hong Kong should move to a RBC regime?

    75%

  • 23

    Capital requirement volatility

    Q3: Should volatility of capital requirement (the risk thereof) be a consideration

    when designing a regulatory capital base? 1 to 5 with 1 = Not at all and 5 =

    Very agree.

  • 24

    Capital regime uncertainties

    The greatest hurdles when moving towards RBC regime

    Long-term products require long-maturity assets to reduce asset and liability mismatch risk, butmarket lack credible HK yield curve.

    Acceptance of industry to penalise current accepted practices (e.g. ALM mismatch) is difficult.

    Equity (subject to higher risk charge) would be less attractive to invest thus par products would be penalised.

    Lack of resources and skills to build and implement RBC for both regulator and insurance players.

    Subject to capital availability in the market.

    Multiple solvency requirements for international insurance companies.

    Only change capital requirement but keep the reserving basis unchanged Should consider both under RBC-type capital regime.

    Require stochastic modelling capability, calibration of shocks, consistent methodology and transparent reporting.

    Lack of historical data to set management action and dynamic policyholder behavior.

  • 25

    Part 1: Risk Management Overview

    Part 2 : Regulatory Impact

    Part 4 :

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