Select Page

Follow me for updates

Follow me to get a notification when I publish valuable articles and posts like this.

I share Thought Leadership on Enterprise Risk Management, Digital Transformation and my own Entrepreneurial journey.

Show your support with a like, comment and SHARE!

When you share, please tag me in the description so I can send you a thank you!

Introduction

There is increasing focus on linking stress testing and capital management in the context of Recovery and Resolution Planning (RRP).

At the Institute of Risk Management #ERM in #Insurance SIG today, we heard three great presentations from:

  • Hanna Cam, Chief Risk Officer, Hiscox plc
  • Martyn Rodden, Chief Risk Officer, MS Amlin Underwriting Ltd and SIG Chairman
  • Stephen Arnold & Jane Portas, Partners PwC

The Global context

Whilst the Prudential Regulation Authority (PRA) has always included a mechanism for RRP within its Rulebook, post financial crisis there has been more emphasis on mandatory RRP for Globally Systemically Important Insurers (G-SII) and in some cases for Internationally Active Groups (IAGs) and Domestic insurers.

The 2018/19 Business Plan published by the PRA again identifies the release of prior year reserves as a key area of importance. Following the collapse of Carillon, regulators have become more focussed on materially important outsourced arrangements and the importance of connected business risks.

The Financial Conduct Authority (FCA) has also demonstrated a growing interest in the conduct implications of RRP.

In practice

In practice the regulated firm will be focussed on the ‘Recovery’ component of RRP, as the situation becomes more serious the regulators will increasingly take control and drive the ‘resolution’ component.

The challenge firms face is that RRP falls outside of Stress & Scenario Testing/Reverse Stress Testing and development of the Own Risk Solvency Assessment (ORSA). Whilst capital modelling forms an important part of the thinking, internal models do not calibrate for unexpected ‘hard’ market turning events.

Approach

Method 1 – The firm identifies corrective actions arising from a market event by building out existing ORSA scenarios. The challenge is to build granular scenarios that provide insights into both capital modelling and operational resilience:

  • can you still serve your customers?
  • do you need additional capacity?

Method 2 – Develop broad scenarios that have unknown impacts and progressively work backwards to identify corrective actions. These exercises are performed separate from the main business and is likely to incorporate a number of sources (emerging risks, reverse stress tests, horizon scanning)

Whatever method adopted, a tipping point is the Recoverability Assessment which identifies both Triggers and Corrective Actions.

Learning from experience

The London Market Dry Run Simulation provided useful insights into the development of RRPs:

  • Identifying the impact of corrective actions for each part of the business and importantly critical functions
  • Whatever the scenario (derived from Method 1 or 2 above), ensuring there is cross-functional dialogue
  • The benefit of aggregating individual scenarios for discussion with the Board
  • The importance of developing both qualitative (how you react) and quantitative (impact on the capital base) scenarios
  • Identifying triggers (increasing complexity, Brexit, Performance, M&A etc.)
  • Recognising that ‘non-viability’ can occur before capital constraints prevent BAU
  • Adjustments to Capital Management policies to create buffers
  • Thinking about the range of corrective actions (credit facilities, reinsurance, capital raising, reduce the volume of business written, run-off, disposal etc.)

Final thoughts

Both the PRA and FCA are likely to place even more importance on the development of RRP. Thinking carefully about tangible scenarios that can have both a financial and non-financial impact on the firm will become increasingly important.

Reciproco provides knowledge integration across risk, solvency and strategy, including digital transformation, leading complex and unique projects in regulated sectors. Helping senior executives and management teams focus on strategic challenges to create a competitive advantage.

Darren Munday is the founder and Managing Director of Reciproco. An experienced executive with over 20 years’ global experience with multinational companies, including Chief Risk Officer reporting to the Board.

Darren is an Honorary Visiting Fellow of the Digital Leadership Research Centre, Cass Business School where he also holds an Executive MBA.  Darren is a Certified Fellow of the Institute of Risk Management (CFIRM) and Chartered Insurance Risk Manager (ACII) of the Chartered Insurance Institute.


All rights reserved. Unauthorised use and/or duplication of this material without express written authorisation from Darren Munday is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Darren Munday with appropriate and specific direction to the original author and content.