 By Tim Edwards, Director, Insurance and Investment Management, PwC
A theme that has been quite consistent across PRA engagement with insurers across the market has been a forward-looking view of the business and its consequent risks. One topic that has raised a few eyebrows is what we could call the “positive risk scenario”. This puts quite a different twist on the now tried-and-tested scenario testing for all firms.
Conventional stress and scenario testing is now pretty well understood. Insurers are quite accustomed to identifying potential risks, quantifying their possible impact, considering the probability of them occurring, and then examining how to monitor their emergence, and apply mitigating tools to reduce the cost if the event should occur. “Ripple effects”, or the knock-on impact into other risks, are also now commonly addressed.
The “positive risk scenario” moves the ORSA from simple risk management to being an enterprise risk management tool. It links the ORSA to the PRA’s focus on the forward-looking risk profile of the business, and it has been widely welcomed by company directors as being important and of practical application. In some cases, non-executive directors have suggested that it has brought the ORSA to life. So, what’s the big deal?
The simple question that needs to be addressed is “what if it all goes right?” In creating a forward-looking plan, an insurer is looking into the future, identifying opportunities for top-line and bottom-line growth and so develop their business over at least a three-year time horizon. It is not just insurers who have demonstrated historically that with growth comes risk, of course, but our industry has many examples of where firms have struggled to manage the impact of success.
Risks that need to be considered encompass the need for capital to support the expanded business, but also the changing risk profile and dependency structure as a result of having a different business mix – whether lines of business or simply the balance of underwriting and reserve risk. It also requires an examination of the firm’s position within the market as well as of the potential for competitor response. There is also a need to examine the skills and experience needed to manage the larger business – including at Board level, as well as in underlying technical disciplines. Organisation and governance also need replanning – in part to avoid the risk of simply adding bodies, extending the duration of meetings, increasing their frequency and so gradually slowing the whole organisation down.Even premises need to be considered – staff morale is not helped by cramming people into inadequate space, but dividing staff between different premises is hardly ideal either.
The good news is that in our experience, from Board down firms rather enjoy considering the risk implications that might arise out of success. It is not an exaggeration to claim that this work is even bringing the ORSA to life and putting the “enterprise” into risk management.
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