Strategic Business Risk

Insurance 2008
Jim Doherty

Association des actuaires

Investors want to know about risks and

risk management

“By declaring the risks, and

quantifying them somehow, “The company has to show
they give investors in detail how it operates its
confidence in the company.” current risk management. It
has to show it has a clear
knowledge of the difference
between business risk and
“They can show what
financial risk.”
systems they have for
risk management.”

“Demonstrating how the risk approach

adds value; showing the benefits of
protection through risk management.”

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May 22, 2008 Page 1 Association des actuaires

 Yet there is a strategic risk management gap

An enterprise risk assessment does not always go beyond financial reporting

Q: What is the focus of the risk assessment?

Focus of risk assessment

► 72% of respondents focus
► Operational/business risks 22%
on all four areas of risk in
► Financial/financial reporting risks 20% their assessment

► Compliance risks 14% ► 28% of respondents do not

focus on all risk categories
► Strategic risks 7%
► Strategic risk is the least
focused on

Separate risk categories 28%

All risk categories 72%

Note: Multiple responses were possible

Source: Ernst & Young, 2007 from Compliance to Competitive Edge

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Strategic risk: destroyer of value

► If strategic growth is a significant driver of value in

companies, understanding strategic risk is of high
importance
► Review of large share price drops suggests that strategic
risk can be a dangerously quick and permanent
destroyer of corporate value (Ramse Consulting)
► But strategic risk has been neglected in recent years,
with resources prioritised on financial and compliance risk
and less focus in enterprise risk assessments

Page 4 Top 10 risks for the insurance industry

May 22, 2008 Page 2 Association des actuaires

 EY Research Report
Strategic Business Risk – Insurance 2008

Page 5 Top 10 risks for the insurance industry

EY Research Report
Risk Identification

Subject Matter Experts

► Macroeconomics ► We worked with Oxford Analytica to

► International trade
interview more than 70 analysts
► Finance ► These included specialists in over 20
► International security subjects with crucial impacts on business
► Information technology performance
► Law ► Interviews were open-ended
► Environmental issues
► Analysts were asked to
► Business regulation ► list, rate and comment on the 10 most
► Social trends significant trends or uncertainties that may
► Research science impact companies
► list the five most significant strategic business
► Energy
risks to firms within their industries
► Business strategy

Page 6 Top 10 risks for the insurance industry

May 22, 2008 Page 3 Association des actuaires

 EY Research Report
Risk Prioritisation

Industry

► Banking and capital markets ► Panels of sector experts, including

► Technology
journalists, researchers, advisors and Ernst
& Young Practice professionals rated the
► Insurance
severity of the sector risks using a
► Consumer products
numerical rating
► Oil & Gas
► Analysts were asked to rate
► Asset management
► The loss impact
► Automotive
► The competitive impact
► Media and entertainment
► Telecommunications ► The risks that were rated as having the
► Utilities greatest impact across the largest number
► Pharmaceuticals
of sectors were identified as the ‘top
business risks for global business’
► Real estate
► Biotechnology

Page 7 Top 10 risks for the insurance industry

Top 10 risks for the insurance industry

1. Climate change
2. Demographic shifts in core markets
3. Catastrophic events
4. Emerging markets
5. Regulatory intervention
6. Channel distribution
7. Integration of technology with operations and strategy
8. Securities markets
9. Legal risk
10. Geopolitical or macroeconomic shocks

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 The Ernst & Young strategic business risk radar

► Our risk radar is a simple device to

present a snapshot of the top 10 strategic
business risks for a company, a sector or
indeed the global economy as a whole

► Not all strategic business risks are the

same in nature, therefore we have divided
the radar

► macro threats that emerge from the general

geopolitical and macro environment in which
we all operate;

► sector threats that emerge from trends or

certainties that are re-shaping the specific
industry;

► operational threats that have become so

intense that they may impact the strategic
performance of leading firms

Page 9 Top 10 risks for the insurance industry

Risk radar:
Top 10 risks as macro, sector or operational threats

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May 22, 2008 Page 5 Association des actuaires

 1. Climate change

► A long-term risk with broad-reaching

implications
► Can affect pricing structures, reserving policies, solvency
► Can lead to broader, more gradual consequences
including:
► Mortality and health problems
► Spread of environmentally-related litigation
► Political risk linked to conflicts for control of resources or
inadequate response by governments

Page 11 Top 10 risks for the insurance industry

2. Demographic shifts in core markets

► Creates new demands that insurers are

well-placed to satisfy
► New products for changing financial, and retirement,
needs (the pay-out phase)
► Key challenge will be to maintain market share in core
markets in the face of competition from other sectors

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 3. Catastrophic events

► Rising costs increase potential impact

on insurers’ earnings and capital
► Significant challenges include:
► Capital – available / required
► Pricing
► Contract structure
► Financing

Page 13 Top 10 risks for the insurance industry

4. Emerging markets

► Both a risk and an opportunity

► success is not guaranteed
► Competitive threats could see today’s leading global
players displaced
► Many companies’ growth strategies are essentially
emerging market strategies, but challenges abound

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 5. Regulatory intervention

► New regulatory developments and

increased scrutiny
► Could result in changes in operations and underwriting
practices
► Politically-driven intervention could enhance risk
► Compliance costs, primarily driven by government policy,
can be unpredictable

Page 15 Top 10 risks for the insurance industry

6. Channel distribution

► Technology can change how insurance

services are sold
► Traditional agent based distribution models are under
pressure from technologies that allow companies to reach
clients directly
► Competitive advantage goes to companies with multi-
channel access for sales and information

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 7. Integration of technology with
operations and strategy

► Technology must be seen as an enabler

to keep up with the competition
► Technology has:
► Opened new distribution channels
► Allowed more sophisticated and accurate underwriting
► Reduced unit policy processing costs
► Related risks include the threat of cyber-terrorism and
over-dependence on outsourcing partners

Page 17 Top 10 risks for the insurance industry

8. Securities markets

► Pressure from securities markets needs

to be closely monitored
► New players are entering the market
► Financial innovation has seen:
► Blended products challenge the position of traditional insurance
companies
► New sources of capital investing in insurance start-ups

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 9. Legal risk

► Legal uncertainties could threaten a

company’s standing or result in financial
loss
► Three main areas of liability law:
► Environmental
► “Managerial”
► Undeveloped

Page 19 Top 10 risks for the insurance industry

10. Geopolitical or macroeconomic

shocks

► Global Economic Threats

► Financial melt down from derivatives and hedge funds
► Fuel prices
► Terrorist activity

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 Potentially above
the radar… …within 5 years

1. Over-reliance on model-based risk management

2. Threats to the reputation of the industry
3. Losing the war for talent
4. Increasing corporate exposure to global regulatory heterogeneity
5. Possible emergence of entirely new risks

Page 21 Top 10 risks for the insurance industry

Are you protected?

Are you missing out on opportunities?

► How does your company identify, assess, manage and monitor strategic risk?
► How do you exploit strategic risk as a point of competitive advantage?
► Who assures the strategic initiative portfolio from selection through to benefits
delivery?
► What is your equivalent of the Strategic Risk radar?
► How do you keep it refreshed?
► How does it warn you of impending danger?
► What infrastructure exists to assure controls are in place over strategic
business risks?

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 Possible management action

► Conduct an annual risk assessment that defines key risks and weights
probability and impact on business drivers
► Extend the risk assessment beyond financial and regulatory risk to consider
the wider environment in which your organisation operates and the full extent
of its operations
► Conduct scenario planning for the major risks that you identify and develop a
number of operational responses
► Evaluate your organisation’s ability to manage the risk that you identify
► in particular ensure that your risk management processes are linked to the risks that
your business actually faces
► Ensure you have effective monitoring and controls processes that can give
you both earlier warning and improved ability to respond
► Keep an open mind about where risks can come from.
► We live in an increasingly interdependent global economy and risks that can
damage your business can initiate in markets and sectors a long way from your own

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Questions & Answers

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 “It is never
the risk
that causes damage
or creates opportunity –
it is
the response.”

Thank you
Strategic business risk

Association des actuaires

May 22, 2008 Page 13 Association des actuaires