RISK MANAGEMENT BY UK LIFE ASSURERS – A SURVEY
by David Bartlett, Mark Chaplin, Kevin Dowd, Patrick Kelliher and Chris O’Brien
(Faculty and Institute of Actuaries working party on risk management in UK life
assurers)
December 2005
ABSTRACT
This paper reports the results of a questionnaire survey sent to actuaries in UK
life assurers in autumn 2004. It describes how enterprise risk management is
carried out in UK life assurers, and the processes used for identifying, measuring
and managing risk. It also considers what differences there are in risk
management between different types of firm.
1.
Introduction
The Faculty and Institute of Actuaries working party on risk management in UK
life assurers has carried out a survey of enterprise risk management practices.
We plan to issue an extended paper that details the background to the
development of risk management in the life assurance industry; however, we
wished to disseminate the results of the survey at this stage. The extended paper
may also include some further analysis of the survey results.
We issued a questionnaire to appointed actuaries in September 2004, and
received 39 responses. We asked them to pass it on to the most appropriate
person in the firm/group to complete. We are grateful to all those who took part.
The analysis of those responses is the basis of this paper.
We recognise that risk management practices in the industry have been changing
rapidly and can be expected to continue to do so. In particular, the requirement
of the Financial Services Authority for firms to carry out Individual Capital
Assessments (due to be completed by end-2004) has had an important effect on
firms enhancing their risk management processes. The survey results should be
seen as a benchmark against which future changes in risk processes can be
compared.
The number of respondents is such that undue significance should not be
attributed to small differences found in the analysis.
This paper represents the views of working party members and should not be
regarded as representing the views of the profession or our employers.
Section 2 of this paper summarises the key findings. Section 3 sets out the
characteristics of the firms of the respondents. Section 4 describes the approach
that firms take to risk management. Section 5 refers to the risk organisation
structure, section 6 to risk identification, section 7 to risk measurement and
section 8 to risk management. There are some miscellaneous findings in section
9.
Feedback on the results would be welcomed and should be addressed to David
Bartlett, David.Bartlett@resolutionplc.com (from whom a copy of the
questionnaire can be obtained).
Risk mgt life assurers – survey
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The working party previously issued a paper on liquidity risk management, which
can be found on the profession’s website.
2.
Summary
Life assurers have been making increasing use of enterprise risk management
(ERM). On a scale from 0 to 5 (5 = fully functioning ERM system), the average
rating was 3.4, while respondents assessed the comparable rating 2 years
previously as only 1.8. Practically all the respondents considered that their risk
management practices were either closely or reasonably well aligned with their
business objectives.
We put forward some possible reasons for developing risk management practices;
compliance with FSA regulations was mentioned most often, with good business
practices a close second.
33 of the 39 firms had an explicit risk function; 21 had a chief risk officer, 30 had
a risk committee. The most important skills required for the function were
actuarial, accounting/financial, legal/compliance and operations (of course, the
survey was addressed to actuaries).
The risk identification process is formally re-run monthly or quarterly in 18 firms.
The most frequently found measure of risk is losses that arise in a stress test;
some firms use the probability of solvency being less than a specified level, or
value at risk. Risk measures are used as management information, and then
primarily for setting the risk appetite and allocating capital. The survey shows the
methods that firms use to assess risks, with stochastic methods used primarily for
market risks. Some firms allow for diversification benefits, the proportion being
highest at 55% for market/credit risks.
Risk identification and risk measurement processes are used directly for a variety
of purposes, notably setting risk policies, strategic asset allocation, new product
design and pricing, assessing strategic options and investigating possible hedges.
The main obstacles to effective ERM were seen as insufficient resource and data,
and cost.
The survey found some differences between types of firm in the responses.
Mutuals gave a somewhat lower answer for the extent to which an ERM
framework was in place. They emphasised compliance with FSA regulations as the
main reason for developing risk management practices, whereas proprietary firms
rated good business practice as most important.
Small firms were less likely to have appointed a chief risk officer and scored lower
on reporting risk measures to the board.
The following graphs summarise some of the results in the survey.
Risk mgt life assurers – survey
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No. of firms
ERM framework
20
15
10
5
0
2 years
previously
Now
0
1
2
3
4
5
Max = 5 (fully
functioning)
ERM alignment with business
objectives
No. of firms
25
20
15
10
5
0
1
2
3
4
Max 4 = closely aligned
Reasons to manage risk
2.5
Rating
2
1.5
Prop
1
Mutual
0.5
Risk mgt life assurers – survey
3 of 14
Comp
advantage
Reduce
volatility
Scarcity of
capital
Corp
governance
Compliance
Good bus
practice
0
Allowance for diversification
benefits
Proportion of firms
Market/credit
Market/liquidity
Market/insurance
Market/op
C redit/insurance
C redit/liquidity
C redit/op
Insurance/liquidity
Insurance/op
Liquidity/op
0%
3.
20%
40%
60%
Firms of survey participants
The participants can be analysed as follows by ownership and whether open or
closed to new business:
Listed
16
5
21
Open to new business
Closed to new business
Total
Proprietary
Unlisted
4
2
6
Mutual
Total
10
2
12
30
9
39
Total
20
7
27
In carrying out analyses we compare proprietary (P) and mutual (M) firms; and
whether they are open (O) or closed (C).
We measure firm size by the value of assets in the long-term business fund.
Assets
No. of firms
< £1 billion
9
£1-10 billion
20
> £10 billion
10
In subsequent analyses we refer to these as small, medium and large (S, M, L)
firms.
The relative importance of the various types of business to the participants is:
None or trivial
Modest exposure
Significant class of
business
Primary class of
business
No response
Total
Withprofits
12
3
10
Property
linked
7
6
16
Index
linked
21
11
4
Protection
Annuity
7
9
14
12
9
16
13
9
1
8
2
1
39
1
39
2
39
1
39
0
39
Risk mgt life assurers – survey
4 of 14
In subsequent analyses we categorise “significance of with-profits business“ as
low (L) (none or trivial, or modest) or high (H) (significant or primary class).
Larger firms are more likely to be with-profits, open to new business and
proprietary1.
4.
Risk management approach
We asked the extent to which firms have a fully functioning ERM framework in
place. We defined ERM as “the holistic and integrated application of risk
management practices throughout an organisation.” We asked for two responses,
firms’ rating currently and two years previously. The scores were from 0 to 5
where 0 = no discernible ERM system, 5 = fully functioning system.
Score
Current
2 years
previously
0
0
0
5
1
2
5%
10
2
3
8%
12
3
13
34%
8
4
16
42%
0
5
4
10%
2
14%
27%
32%
22%
0
5%
No.
%
No.
%
The improvements in scores over the two-year period were:
Increase in score
No. of firms
0
3
1
14
2
15
3
4
4
1
We asked how well does the risk management framework link in with the firm’s
general business objectives. The ratings are:
1 = no link, 2 = some overlap, 3 = reasonably well aligned, 4 = closely aligned
No. of firms
%
1
1
1
3%
2
4
10%
3
20
51%
4
14
36%
The correlation coefficients between the variables were:
Size
With-profits2
Proprietary3
Open4
1
Sizea
1
0.147
0.221
0.225
With-profitsb
Proprietaryc
Opend
1
-0.417
-0.083
1
-0.093
1
1 = small, 2 = medium, 3 = large
0 = low, 1 = high significance
c
0 = mutual, 1 = proprietary
d
0 = closed, 1 = open
a
b
Risk mgt life assurers – survey
5 of 14
Looking at the average scores, we can analyse the responses according to firm
size, ownership, with-profits significance and open or closed to new business.
Avg
Risk
management
framework:
Current
2 years ago
Well aligned?
3.4
1.8
3.2
S
Size
M
L
2.9
1.8
3.1
3.6
1.9
3.4
3.7
1.9
2.9
Ownership
M
P
WP signif.
L
H
3.0
1.5
2.9
3.4
1.9
3.5
3.6
2.0
3.3
3.5
1.8
3.0
Open?
O
C
3.4
1.8
3.2
3.7
2.1
3.3
Participants were asked to identify their top three reasons for risk management;
we show the number of firms where suggested reasons were given.
No.1
8
18
5
3
3
2
Compliance with FSA regulations
Good business practice
Corporate governance guidelines
Scarcity of capital
Reduce volatility of financial results
Competitive advantage
Risk-related losses/near misses in
your firm/group
Risk-related losses/near misses in
the industry
Rating agency pressure
Investment community pressure
Other
No.2
15
7
6
3
2
2
2
1
No.3
10
5
9
5
2
1
1
Total
33
30
20
11
7
5
3
2
2
1
1
1
1
1
2
We now give a score of 3 for each reason ranked no.1, 2 if ranked no.2, 1 if
ranked no.3. The average scores are:
Avg
1.9
1.8
Size
M
1.8
1.6
1.7
1.4
1.8
2.2
1.3
1.2
1.8
1.5
1.7
0.9
0.6
1.3
0.5
0.8
1.0
1.3
0.7
1.0
0.7
0.5
0.4
0.1
0.9
0.6
0.3
0.8
0.1
0.3
0.2
0.6
0.5
0.5
0.4
0.5
0.4
0.4
0.3
0.9
0.6
0.3
0
0.3
0.5
0.4
0.2
0.1
0.4
0.4
0
S
Good business
practice
Compliance with
FSA regulations
Corporate
governance
guidelines
Scarcity of capital
Reduce volatility
of financial results
Competitive
advantage
Note: other reasons
5.
L
2.1
Ownership
M
P
1.5
2.0
WP signif.
L
H
2.0
1.7
Open?
O
C
1.8
2.1
averaged 0.1 or less and no analysis is given.
Risk organisation structure
33 of the 39 firms had an explicit risk function, 6 did not.
21 had a Chief risk officer, 17 did not.
30 had a risk committee, 9 did not.
Risk mgt life assurers – survey
6 of 14
Avg
Explicit risk
function
Chief Risk Officer
Risk committee
S
Size
M
L
Ownership
M
P
WP signif.
L
H
85%
78%
85%
55%
77%
22%
56%
63%
80%
Open?
O
C
90%
75%
89%
94%
78%
87%
78%
70%
90%
25%
58%
69%
85%
67%
88%
48%
70%
59%
80%
44%
67%
The head of the risk function was:
No. of firms
6
15
2
10
6
Finance Director
Chief Risk officer
Appointed/chief actuary
Other
No explicit risk function
The size of the risk function varied from 0 to 22. The averages by category were:
Avg
Risk function size
4.9
S
Size
M
Ownership
M
P
L
0.8
2.5
13.6
4.5
5.1
WP signif.
L
H
1.7
7.2
Open?
O
C
5.4
2.3
Participants were asked to rate the various skills for the risk function on a scale
from 0 (not important) to 5 (top level of importance). The following table shows
for each discipline the number of participants that gave each rating. However,
some respondents did not give a score to certain disciplines; we have excluded
such non-scores from the analysis though recognise that some ought perhaps to
have been treated as zero.
Discipline
Rating
0
0
1
2
0
8
1
7
3
9
Accounting/financial
Actuarial
Asset management
Legal/compliance
Marketing
Operations
Statistical
Strategic planning
Tax
1
2
1
3
2
8
1
5
4
11
2
3
3
6
8
12
8
9
8
5
3
11
7
14
10
5
8
5
13
6
4
14
10
5
7
0
12
6
3
0
5
4
12
3
7
0
4
1
1
0
The average rating given to each discipline was:
Avg
Accountg/financial
Actuarial
Asset managemt
Legal/compliance
Marketing
Operations
Statistical
Strategic planning
Tax
3.4
3.8
2.8
3.3
1.4
3.2
2.0
2.4
1.3
S
Size
M
L
3.7
4.1
2.4
3.9
1.0
3.9
1.3
2.4
2.0
3.2
3.5
3.0
3.4
1.5
2.9
2.1
2.2
0.9
3.6
3.9
2.7
2.6
1.6
3.3
2.4
2.7
1.2
Risk mgt life assurers – survey
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Ownership
M
P
3.7
3.8
2.7
3.5
1.0
3.5
2.0
2.4
1.5
3.3
3.7
2.8
3.2
1.6
3.0
2.0
2.4
1.2
WP signif.
L
H
3.4
3.7
2.9
3.5
1.5
2.9
2.1
2.3
1.2
3.5
3.8
2.7
3.1
1.3
3.4
2.0
2.4
1.3
Open?
O
C
3.4
3.8
2.7
3.2
1.6
3.1
2.0
2.4
1.1
3.5
3.8
3.3
3.7
0.2
3.5
2.2
2.4
2.0
The risk committee comprises:
Non-chair
14
23
15
6
7
16
19
2
>16
4
Chief executive
Finance director
Head of internal audit
Chief investment officer
Chief operations officer
Chief risk officer
Appointed actuary
Non-executive director
Other
N/a
Chair
4
6
0
0
1
2
1
2
0
0
Participants were asked, in an ideal world, would the risk governance be changed
to be:
Business units
Internal audit
4
11
4
5
6
8
More independent of:
More integrated with:
No change
6.
Both business
units and
internal audit
1
4
14
Risk identification
Participants were asked to rate the extent to which firms had a common approach
to risk identification across the firm (0=no commonality, 5= common approach
for all risks).
Score
No. of
respondents
0
1
1
1
2
4
3
8
4
15
5
8
30 have one common risk register/risk map, 8 do not.
Avg
3.6
3.1
Size
M
3.7
79%
67%
90%
S
Common
approach
Common risk
register/map
L
4.0
Ownership
M
P
3.1
3.9
WP signif.
L
H
3.7
3.6
Open?
O
C
3.4
4.3
70%
58%
87%
80%
89%
36 notify the board of all material risks, 2 do not.
Delegated responsibility for risk identification lies with:
Business unit
Risk function
Internal audit
Other
26
11
8
2
Risk mgt life assurers – survey
8 of 14
74%
78%
The frequency of re-running of the risk identification process is:
Annually
Quarterly
Monthly
Other
Never formally but continuous requirement
Never re-run
7.
6
16
2
1
12
0
Risk measurement
Risk measures calculated or calculated and reported to the board are:
Reported to board?
Stress test losses
Probability of solvency less than a specified level
Value at risk
Other
No
2
2
3
0
Yes
28
12
5
0
We analyse the proportion of firms that report risk measures to the board:
Avg
Stress test
losses
Prob. solvency
less than a
specified level
Value at risk
S
Size
M
Ownership
M
P
WP signif.
L
H
72%
56%
65%
100
%
67%
74%
68%
74%
79%
78%
31%
22%
20%
60%
33%
30%
25%
35%
33%
22%
13%
11%
15%
10%
8%
15%
12%
13%
10%
22%
L
Open?
O
C
Firms use risk measures in the following ways:
No. of firms
35
28
11
7
5
1
6
Management information
Limit/risk appetite setting
Allocating capital
Communicating with rating agencies
Calculating business performance
Calculating remuneration
Other
The table below shows the proportions of firm using risk measures in the ways
indicated. It also indicates, in the final row, the total of the number of categories
answered positive for use by firms.
Risk mgt life assurers – survey
9 of 14
Avg
Management info
Limit/risk appetite
setting
Allocating capital
Communicating
with rating
agencies
Calculating
business
performance
Calculating
remuneration
Other
Total uses
S
Size
M
L
Ownership
M
P
WP signif.
L
H
90%
72%
78%
78%
95%
60%
28%
18%
11%
11%
13%
Open?
O
C
90%
90%
83%
67%
93%
74%
94%
62%
87%
78%
90%
73%
89%
67%
25%
20%
50%
20%
8%
8%
37%
22%
25%
19%
30%
17%
30%
17%
22%
22%
11%
15%
10%
8%
15%
19%
9%
10%
22%
3%
0
5%
0
0
4%
6%
0
3%
0
15%
2.4
22%
2.1
15%
2.4
15%
2.7
8%
1.8
19%
2.6
19%
2.4
13%
2.3
13%
2.4
22%
2.4
The number of participants who assess risk in the following ways is:
Ad hoc
calculation/
allowance
Subjective
assessment
Traffic
light/high,
medium,
low system
Deterministic
scenarios
Equity market
3
2
0
13
Equity portfolio*
8
5
0
8
Interest rate
2
2
0
17
Property markets
4
2
0
10
Property
8
5
1
7
portfolio*
IV equity†
3
2
0
11
IV interest rates†
5
1
0
11
Credit spreads
5
2
1
16
Corporate bond
4
4
1
12
defaults
Reinsurance
4
10
3
15
counterparty
Liquidity
6
9
4
11
Mortality
3
0
1
27
assurance
Mortality
2
0
1
25
longevity
Morbidity
5
1
1
22
Persistency
2
1
2
28
Expense
4
3
2
27
Tax
8
10
2
13
Legal litigation
11
19
5
1
Regulatory
9
17
9
2
Mis-selling
8
14
5
5
Other operational
12
11
7
2
* Risk from the firm’s specific portfolio as opposed to market risk
† Implied volatility
Risk mgt life assurers – survey
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Stochastic
scenarios
16
6
15
11
3
9
10
9
11
0
1
4
3
3
2
0
0
0
0
0
1
The average number of risk types for which stochastic scenarios are used is:
Avg
S
Risk types
2.7
0.7
Size
M
2.4
L
4.9
Ownership
M
P
2.8
2.6
WP signif.
L
H
1.0
3.8
Open?
O
C
2.7
2.7
The number of firms who allow for diversification benefits from the following pairs
of risk is:
Market
Credit
18
Market
Credit
Insurance
Liquidity
Insurance
15
14
Liquidity
11
10
9
Operational
12
12
14
8
The proportion of firms, by category, allowing for diversification benefits is as
follows. We also show, on the final row, the average number of types of
diversification benefit that firms allow for. However, we believe that care is
needed in considering the outcome as reported as the question may have been
interpreted in different ways.
Avg
S
Size
M
Market/credit
55%
0
62%
Market/insurance
Market/liquidity
Market/operationl
Credit/insurance
Credit/liquidity
Credit/operationl
Insurance/liqudty
Insurance/opernl
Liquidity/operatnl
Average no. of
types
47%
33%
38%
44%
33%
38%
30%
42%
27%
3.7
0
0
0
0
0
0
0
0
0
0
53%
38%
47%
53%
46%
47%
38%
56%
31%
4.4
8.
L
100
%
88%
62%
62%
75%
50%
63%
50%
62%
50%
6.6
Ownership
M
P
WP signif.
L
H
Open?
O
C
36%
64%
62%
50%
62%
33%
36%
18%
27%
27%
9%
27%
9%
27%
9%
2.3
52%
41%
43%
53%
47%
43%
42%
50%
37%
4.5
50%
31%
42%
50%
36%
42%
27%
46%
27%
3.8
45%
35%
35%
40%
32%
35%
32%
40%
26%
3.6
52%
38%
43%
48%
36%
43%
31%
42%
32%
4.1
33%
22%
22%
33%
25%
22%
25%
44%
12%
2.7
Risk management
Risk identification and risk measurement processes are used directly for the
following purposes.
Purpose
Setting risk policies
Determining strategic asset allocation
New product pricing
New product design
Assessing strategic options
Investigating possible hedges
Determining insurance risk retention levels
Weighing up expenditure on risk controls
Determining tactical asset allocation
Other
Risk mgt life assurers – survey
11 of 14
No. of responses
28
19
17
16
16
15
12
8
6
0
The proportions of firms, by category, giving a positive response to the uses were
as follows. We also show the average number of positive responses for each
category.
Avg
Risk policies
Strategic asset
allocation
Product pricing
Product design
Strategic
options
Possible hedges
Retention levels
Risk control exp
Tactical asset
allocation
No. of positive
responses
9.
S
Size
M
L
Ownership
M
P
WP signif.
L
H
72%
49%
56%
67%
70%
30%
44%
41%
41%
44%
33%
33%
38%
31%
21%
15%
3.4
Open?
O
C
90%
70%
75%
67%
70%
41%
75%
25%
70%
65%
77%
47%
56%
56%
30%
45%
45%
70%
40%
40%
42%
58%
42%
44%
33%
41%
38%
38%
44%
48%
43%
39%
57%
53%
40%
0
0
44%
22%
33%
11%
33%
30%
35%
20%
15%
70%
20%
30%
0
33%
17%
17%
17%
41%
37%
22%
15%
25%
44%
19%
19%
48%
22%
22%
13%
30%
37%
23%
7%
67%
11%
11%
44%
3.4
3.0
4.1
3.5
3.3
3.2
3.5
3.5
2.8
Miscellaneous
The significant obstacles to effective ERM were seen as:
Obstacle
Insufficient resource
Insufficient data
Cost
Diversity of risks
No suitable systems
ERM an impractical goal
Low priority
Lack of senior management support
Other
No significant obstacles
No. of responses
21
20
17
7
7
5
5
3
0
6
The responses, by category of firm, were:
Avg
Resource
Data
Cost
Risk diversity
Systems
Impractical
Low priority
Lack of senior
mgt support
Other
No significant
obstacles
S
Size
M
L
54%
51%
44%
18%
18%
13%
13%
8%
89%
56%
67%
33%
11%
11%
22%
11%
40%
55%
30%
20%
20%
10%
10%
5%
8%
15%
0
0
5%
20%
Risk mgt life assurers – survey
Ownership
M
P
WP signif.
L
H
50%
40%
50%
0
20%
20%
10%
10%
58%
42%
67%
25%
25%
25%
25%
17%
52%
56%
33%
15%
15%
7%
7%
4%
50%
62%
31%
19%
19%
12%
12%
0
57%
43%
52%
17%
17%
13%
13%
13%
60%
57%
53%
20%
23%
17%
10%
7%
33%
33%
11%
11%
0
0
22%
11%
20%
20%
8%
0
7%
22%
0
19%
13%
13%
10%
17%
0
11%
12 of 14
Open?
O
C
We show the expected expenditure on various aspects of risk management over
the next three years (number of respondents). The number in brackets indicates
the score allocated to each answer for the purpose of calculating the average
score for the categories shown in the table following.
Risk organisation
structure
Risk identification
Risk measurement
Risk management
No
expenditure
(0)
8
Modest
(1)
Significant
(2)
23
5
Very
significant
(3)
0
0
0
0
26
21
18
10
15
17
0
0
2
The average score for the categories of firm was:
Avg
Organisation
structure
Identification
Measurement
Management
S
Size
M
L
Ownership
M
P
WP signif.
L
H
1.1
0.8
1.0
0.9
0.9
Open?
O
C
0.9
0.9
0.9
0.4
1.1
1.3
1.4
1.6
1.2
1.4
1.3
1.4
1.4
1.6
1.1
1.4
1.7
1.2
1.4
1.3
1.3
1.4
1.7
1.5
1.4
1.7
1.1
1.4
1.5
1.3
1.4
1.6
1.2
1.4
1.4
We show a number of results according to the priority accorded to “Scarcity of
capital” in the development of the firm’s risk management practices (3 = highest,
0 = lowest). It may be that those marked “1,2,3” will tend to be of weaker
financial strength (although we acknowledge that there may be a number of
reasons for giving scarcity of capital as a reason).
No. of responses
Risk mgt framework - currently
Well aligned with business objectives?
Risk function
Chief risk officer?
Risk committee?
Common approach to risk identification?
Central risk register/map?
No. of categories of use of risk measures
Risk types with stochastic scenarios
No. of types of diversification benefit allowed for
No. of types of purpose for using identification &
measurement processes
Risk mgt life assurers – survey
13 of 14
Scarcity of capital score
0
1,2,3
28
11
3.5
3.4
3.2
3.3
93%
64%
63%
36%
86%
55%
3.6
3.8
82%
73%
2.5
2.0
1.9
4.7
3.8
3.4
3.6
2.6
The following table describes the results of proprietary life assurers according to
whether they are listed or not; the results for mutuals are shown for comparison.
Mutual
No. of responses
Risk mgt framework – currently
Well aligned with business objectives?
Risk function
Chief risk officer?
Risk committee?
Common approach to risk identification?
Central risk register/map?
No. of categories of use of risk measures
Risk types with stochastic scenarios
No. of types of diversification benefit
allowed for
No. of types of purpose for using
identification & measurement processes
12
3.0
2.9
75%
25%
58%
3.1
58%
1.8
2.8
2.3
Unlisted
proprietary
6
3.5
3.5
83%
50%
67%
3.8
100%
2.2
1.3
1.2
Listed
proprietary
21
3.7
2.9
90%
75%
90%
3.9
86%
2.8
3.0
5.2
3.5
4.0
3.1
The respondents were asked to indicate their role in the firm:
Appointed/ chief actuary
Chief risk officer
Finance director
Director of legal / compliance
Other
24
5
0
0
9
Note that some questions were not answered by every respondent.
Risk mgt life assurers – survey
14 of 14