A GlobeRisk Perspective on Non Life Insurance
Whilst Non Life firms were not critically affected by recent stock market and bond market developments, they have faced their own issues. For example:
- Flood damage is now the largest source of claim for UK personal lines
- Liability claims inflation continue to rise globally
- Catastrophe business has become exceptionally difficult to model/price
- ICA (i.e. the UK forerunner to Pillar2)
Broadly speaking, non life business falls into three categories:
- Personal lines protection products sold on a "fear" basis. These tend to have low overall claim ratios and are very profitable
- High volume personal lines where the overall claims ratio is close to 100% of premium for most firms
- Commercial Lines, especially liability and catastrophe, where the overall claims ratio is highly variable form one period to the next
With the exception of the first category, insurance risk management, particularly risk rating, acceptance underwriting and claims underwriting, is critical to performance unless a firm is operating from a low cost environment.
In recent years operating platform competition has become intense starting with telephone firms such as Direct Line, Internet based firms such as eSure and low cost selling strategies such as TESCO. Such competition is likely to continue for some time.
Whilst risk rating and overall insurance risk management has improved somewhat in recent years, it still falls some way short of banking standards, particularly in respect of using risk management capability to create competitive advantage. In some ways this is counterintuitive since for most non life firms risk management is much more critical to performance than is the case for banks.
Solvency2 is likely to change the sophistication of non life risk management for ever. In line with risk based regulation everywhere, there are incentives for firms that invest in good quality risk management. For non life firms risk rating models are the key. Unlike other financial services segments, in non life business improved risk rating drives directly through to improved risk acceptance and additional profitability.
Thus, unlike Basel2 where some banks put together their "response" at the last minute, non life firms have a large profit incentive to move quickly... and a large problem if they lag behind the pack. GlobeRisk sees an "arms race" developing in 2008 and 2009 as firms start to invest strongly in Solvency2 weaponry.
GlobeRisk has developed several consultancy services to assist Non Life Firms with the Solvency2 challenge
In respect of controls, governance and operating models, GlobeRisk services include
- Operating Model and Governance design
- Controls reviews
- Review of GENPRU 1.2.26/30 (sufficiency of capital, liquidity and other resources) and GENPRU 1.2.42 (stress and scenario testing)
In respect of the extension to Solvency 2, GlobeRisk services include:
- IRCA/ICAAP preparation and/or review
- Pillar2 Health check
- Model review and validation
- Program management
- Solvency2 Program Management
On a more traditional perspective, GlobeRisk services include:
- Review of Office and DFA models
- Review, design and implementation of risk rating models
- Review, design and implementation of underwriting management
- Reserves Reviews
From a Firmwide risk management perspective, GlobeRisk services include:
- Maximise your Share Price
- Risk Adjusted Performance Management and Value Based Management (VBM)
- Economic Capital and Risk Based Shareholder Value
- Design of firmwide operating models
- Capital Efficiency program
- Governance, Controls, Audit and Risk Management framework optimisation
- Total Enterprise Risk Management (TERM)
- Strategy Development assistance