In uncertain times economically and politically, the role of chief risk officer takes on even greater importance. Simon Gadd, CRO at Legal & General, talks to Richard Schneider about the challenges of risk management from a life insurance perspective
It's six months since Simon Gadd was appointed chief risk officer (CRO) at Legal & General, having previously run the insurer's annuities business. So what are his big concerns and how is he enjoying the new career direction?
Tell us a little about your career to date.
I have spent all of my working career with Legal & General, joining directly from completing a mathematics degree at Oxford University. Despite this, my career has been varied, having performed a wide variety of roles. Some of these have been actuarial, such as pricing, and some very much non-actuarial, including marketing, IT support and training in customer care. Most recently, I have run a variety of businesses, including our retail protection, group protection and annuities businesses.
Do you ever regret choosing an actuarial career?
Once I realised in my early teens that a career as a professional footballer was not possible, I had no regrets about my subsequent choice to become an actuary. It has given me a varied, stimulating and rewarding career. If I had been limited to technical actuarial work, I would probably have got frustrated. However, actuarial skills combined with some commercial acumen and management skills open up great opportunities in a variety of influential roles. The insight that an actuary acquires into how an insurance company makes money from managing risk is a great asset in a business leadership role.
How do insurers compare with other industries in managing risks, and are there any risks life insurers should never have taken on?
Insurers are definitely more suited to identifying risk, as the taking and management of risk is core to their business model. However, there are examples of insurers becoming blind to some major risks in their business model, or stretching to areas beyond their capability set, so there may be opportunities to learn from other industries. In particular, manufacturing industries are probably more expert in identifying and managing operational risk. Insurers should not take on risks they do not understand or that cannot be controlled. An example was involvement in the credit default swap market.
What are the difficulties in developing a risk framework given uncertainty around Solvency II?
The fundamental risks run by insurers do not change because of a change to the regulatory capital regime, so, to a degree, the risk framework can be designed and run without certainty on the Solvency II outcome. It is often best to think of regulation as just another risk to the business. If you understand the range of potential outcomes, this can be measured and monitored alongside other risks. However, from a capital planning perspective, it is clearly unhelpful that the timing and outcome of Solvency II is so uncertain.
What challenges do insurance CROs face?
We are living in a very uncertain world, both economically and politically, with unprecedented levels of monetary intervention by central banks. So the primary challenge for the CRO is to understand how these forces and events may play out and affect the insurer's balance sheet and strategy.
In addition, the CRO needs to understand and help the business to interpret the changing regulatory landscape. With both the interaction between European intervention and UK regulation, and the potential effect of the two new UK regulators - the Prudential Regulation Authority and the Financial Conduct Authority - there is plenty of opportunity for overlapping and conflicting requirements. If the group is operating across different territories, each with different regulatory environments, then balancing the desire for a consistent approach across the group against local constraints poses another challenge.
Does the CRO role have an upside and how do you measure success?
First, success is very much aligned to the success of the business. An insurance company that manages risks well will be well placed for long-term sustainable profitability, although this alone will not deliver success. Investors in insurance company shares are looking for growing profit streams, but also predictability and minimal volatility. So the role of the CRO in helping the business minimise unexpected volatility through good risk management can often manifest itself in strong share price performance.
However, measuring the explicit impact of the CRO in a second-line role can be difficult and is clearly more subjective than assessing the performance of the first-line management team. Seeking the opinion of first-line managers regarding the influence exerted by the risk function is an important part of the overall assessment.
What does a typical day in the office look like?
Given that the CRO role looks across all the diverse activities of a group, it would be easy to spend all day in governance and other meetings. The CRO needs to create time to look outside their organisation at the external influences that may affect the performance of the company, including economic, market, regulatory, social and other factors.
What do you do in your spare time?
My wife and I have six-year-old twins, who tend to take first priority over any spare time! My other passion is sport, so any time that remains is spent playing golf or watching sport - in particular, following my football team, Chelsea, or England rugby.