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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 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.
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.)
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.
Darren provides Enterprise Risk Management advisory services to the Insurance and Investment Management sectors. Helping Board and C-level executives address strategic challenges, by delivering solutions that create Enterprise Value and improve business performance.
Darren is 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.
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