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01

Risk appetite statements not meshing with business needs, Towers Watson poll finds

Open-access content Thursday 9th January 2014 — updated 5.13pm, Wednesday 29th April 2020

Many senior insurance executives are dissatisfied with the business advantages gained from the investing time and money in developing risk appetite statements, Towers Watson has warned

In its Risk appetite revisited report published today, the actuarial firm recommended methods for realigning risk taking with business mission strategy. Towers Watson highlighted the need for a framework of risk tolerances and risk limits that could be monitored in real time to support day-to-day decision making within the business. 

'Many insurers are concerned that their risk appetite statements don't synchronise with the daily running of the business,' said Martha Winslow, Towers Watson's property & casualty ERM practice leader for the Americas. 

'In fact, one chief executive who participated in the survey described his company's risk appetite statement as "high quality, but somewhat sterile". To some extent, this sentiment stems from development efforts that have been driven by external regulatory compliance requirements.'

According to a Towers Watson's Global enterprise risk management survey nearly three-quarters of insurers (74%) now have defined risk appetite policy statements, yet just 43% have demonstrated consistency with their risk limit structure. 

In addition, over three-quarters recognised the need to further develop their risk appetite statements, with 40% listing it as their top ERM priority.

The firm proposes that insurance companies could better align risk appetite with the business mission by organising their objectives into four quadrants: achieving targeted performance; preserving capital adequacy; maintaining liquidity; and protecting franchise value. Also, companies could also consider embracing certain methods for managing risk tolerance and improving the testing of long-term risk resilience, in particular, by introducing the idea of 'adaptive buffers', the firm added. 

As such financial and non-financial measures should be used to assist virtual live monitoring of risk tolerance. The firm said this would cover all mission-critical aspects of the business, such as capital buffers, reinsurance and hedging, rating agency relationships, employee engagement and customer affinity programs.

Mark Scanlon, the firm's life ERM practice leader for the Americas, added: 'Linking risk appetite to mission impairment and building in appropriate metrics are essential steps in moving statements from being theoretical to actionable in our view.'

This article appeared in our January 2014 issue of The Actuary.
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