-New products such as credit and weather derivatives
-Globalization of commercial business
-Technological improvements to businesses and processes
-Lines between financial markets continue to blur
E&Y identifed three specific areas where P&C insurers need to improve:
1)Risk-Adjusted Performance Measurement (RAPM). Many insurers still measure their performance without regard to risk by evaluating themselves based on their combined ratio or ROE. A risk-adjusted measurement would give more direct and meaningful linkage to the creation of shareholder value. Issues to consider in a RAPM process include:
-Common risk metrics between markets for comparison
-Correlation of risks and the effects of diversification
-Reconciliation of economic capital with regulatory/rating agency capital
-Availability of data, integration of multiple risk models, modeling automation
-RAPM tied to incentives
2)Credit Risk Management. The amount of credit risk that insurers hold has been steadily increasing as capital markets and insurance operations continue to merge. Issues to consider in credit risk management include:
-How different industries measure and mitigate credit risk
-Credit risk concerns are rising as exposure increases
-Market-based models are better than credit ratings and fundamental analysis
3)Operational Risk Management. An effective operational risk management framework has three distinct stages:
-Risk Identification, Assessment and Mitigation--the identification, prioritization, and assessment of operational risk at strategic, tactical and operational levels
-Risk Monitoring--the monitoring of key risk indicators and loss events to track the company's risk level, take actions to modify its risk profile, and improve business processes
-Risk Measurement--the measurement of expected and unexpected loss arising from operational risk events to determine capital at risk and enable efficient capital allocation
Making improvements will require you to set priorities and decide what to tackle first. These decisions will depend on how strong your current processes are and where you have the most exposure. SS&C's financial modeling product, Finesse, can help you translate your risk exposures into financial statement impacts so you can decide where to start.
