How insurers can make sense of risk

With Solvency II fully in force, the insurance industry has entered a new phase of transformational development. For many insurance companies, Solvency II has provided the opportunity to make better sense of risk and yet, insurance companies continue to operate using risk management programs that have not evolved and may not protect them from the complex world of uncertainties.

The ability to reflect the dynamics of today’s world of uncertainties is increasingly important. Unfortunately, risk management programs that carried companies through in the past are not good enough anymore. The future is a forward looking, insight driven, value creation, risk-based strategic approach.

Importantly, as the management and prudential view switches from “How did we do over last year” to forward looking strategic “How we are going to do over the coming years and what are the risk reward trade-offs we are making in order to set ourselves up?”, risk takes on a new meaning.

Progressing from a “traditional” risk management, to forward looking enterprise risk management and value creation, risk-based performance approach requires focusing on both capturing upside opportunities, as well as protecting the business.

However in reality, the pattern of risk is not linear, involving a complex interplay of dynamic external influences and unpredictable human behaviour. How we embed risk as a capability across the organisation and ensure risk becomes part of a strategy process is therefore crucial.

Enterprise risk management (ERM) programs can help improve the treatment of risks in a number of ways, such as establishing a structure to track decisions throughout their implementation. Such programs are increasingly being used as the logical and evolutionary response to growing complexity and uncertainty. Yet it’s important to ensure that programs used are not only aligned with business models and strategic objectives, but that issues such as having the most appropriate ERM target operating model are reviewed and in place.

With uncertainties such as volatility of global business environments and markets, velocity of change and digital disruption and cyber threats rapidly increasing, the ability to identify, manage, exploit and monitor these uncer-tainties/risks with evolutionary and fit-for-purpose ERM systems will shape the future of insurance organisations and their business models.

Read our new report with Chartis Research entitled The Case for Enterprise Risk Management in Insurance.