ICP 16 Enterprise Risk Management for Solvency Purposes

The supervisor requires the insurer to establish within its risk management system an enterprise risk management (ERM) framework for solvency purposes to identify, measure, report and manage the insurer’s risks in an ongoing and integrated manner.


Enterprise risk management framework - risk identification


16.1

The supervisor requires the insurer’s ERM framework to provide for the identification of all reasonably foreseeable and relevant material risks and risk interdependencies for risk and capital management.



Enterprise risk management framework - quantitative techniques to measure risk


16.2
The supervisor requires the insurer’s ERM framework to:
  • provide for the quantification of risk and risk interdependencies under a sufficiently wide range of techniques for risk and capital management; and
  • as necessary, include the performance of stress testing to assess the resilience of its total balance sheet against macroeconomic stresses.


Enterprise risk management framework - Inter-relationship of risk appetite, risk limits and capital adequacy


16.3

The supervisor requires the insurer’s ERM framework to reflect the relationship between the insurer’s risk appetite, risk limits, regulatory capital requirements, economic capital and the processes and methods for monitoring risk.


Enterprise risk management framework - risk appetite statement


16.4
The supervisor requires the insurer to have a risk appetite statement that:
  • articulates the aggregate level and types of risk the insurer is willing to assume within its risk capacity to achieve its financial and strategic objectives, and business plan;
  • takes into account all relevant and material categories of risk and their interdependencies within the insurer’s current and target risk profiles; and
  • is operationalised in its business strategy and day-to-day operations through a more granular risk limits structure.


Asset-liability management, investment, underwriting and liquidity risk management policies


16.5

The supervisor requires the insurer’s ERM framework to include an explicit asset-liability management (ALM) policy which specifies the nature, role and extent of ALM activities and their relationship with product development, pricing functions and investment management.


16.6
The supervisor requires the insurer’s ERM framework to include an explicit investment policy that:
  • addresses investment risk according to the insurer’s risk appetite and risk limits structure;
  • specifies the nature, role and extent of the insurer’s investment activities and how the insurer complies with regulatory investment requirements; and
  • establishes explicit risk management procedures with regard to more complex and less transparent classes of asset and investments in markets or instruments that are subject to less governance or regulation; and
  • as necessary, includes a counterparty risk appetite statement.


16.7
The supervisor requires the insurer’s ERM framework to include an underwriting policy that addresses the:
  • insurer’s underwriting risk according to the insurer’s risk appetite and risk limits structure;
  • nature of risks to be underwritten, including any material relationship with macroeconomic conditions; and
  • interaction of the underwriting strategy with the insurer’s reinsurance strategy and pricing.


16.7.1    
An underwriting policy should cover the underwriting process, pricing, claims settlement and expense control (where applicable and relevant to the expenses of the underwriting process). Such a policy may include:
  • the terms on which contracts are written and any exclusions;
  • the procedures and conditions that need to be satisfied for risks to be accepted;
  • additional premiums for substandard risks; and
  • procedures and conditions that need to be satisfied for claims to be paid.

16.7.2    
Control of expenses associated with underwriting and payment of claims is an important part of managing risk especially in conditions of high general rates of inflation. Inflation of claim amounts also tends to be high in such conditions for some types of risk. Insurers should have systems in place to control their expenses. These expenses should be monitored by the insurer on an ongoing basis.

16.7.3    
The underwriting policy should take into account the effectiveness of risk transfer. This includes ensuring that:
  • the insurer’s reinsurance programme provides coverage appropriate to its level of capital, the profile of the risks it underwrites, its business strategy and risk appetite; and
  • the risk will not revert to the insurer in adverse circumstances.

16.7.4    
In addressing the nature and amount of risks to be underwritten the underwriting policy should cover, at least:
  • product classes the insurer is willing to write;
  • relevant exposure limits (eg geographical, counterparty, economic sector); and
  • a process for setting underwriting limits.

16.7.5    
The underwriting policy should address the potential impact on the insurer’s financial position from material correlations between macroeconomic conditions and the insurance portfolio (for example by assessing the potential impact stemming from certain insurance products with embedded guarantees and options).

16.7.6    
The underwriting policy should address:
  • how an insurer analyses emerging risks in the underwritten portfolio; and
  • how emerging risks are considered in modifying underwriting practices.

​16.7.7     
The underwriting policy should describe interactions with the reinsurance strategy and associated credit risk, and should include details of the reinsurance cover of certain product classes or particular risks.

​CF 16.7.a    
The group-wide supervisor requires the Head of the IAIG to ensure that the IAIG implements its group-wide ERM framework by establishing procedures and monitoring practices for the use of sufficient, reliable and relevant data for its underwriting, pricing, reserving and reinsurance processes.

​Group-wide claims management policy

CF 16.7.b     
The group-wide supervisor requires the Head of the IAIG to establish and maintain a group-wide claims management policy, as part of the group-wide ERM framework, that includes procedures for:
  • claims estimation and settlement;
  • feedback into the group-wide underwriting policy and reinsurance strategy; and
  • claims data reporting for group analysis.

CF 16.7.b.1     
The group-wide claims management policy may establish procedures for:
  • delegations of authority for claims settlement;
  • criteria for accepting or rejecting claims; and
  • escalating claims.

​CF 16.7.b.2    
 A group-wide claims management policy should allow insurance legal entities to establish individual claims management policies and processes, adjusted to supervisory requirements and circumstances in their jurisdictions.

​CF 16.7.b.3    
 Escalating claims may include information about sudden increases in claim activity, delays in settlements and increased rejections.

​Group-wide strategy for reinsurance and other forms of risk transfer

CF 16.7.c     
The group-wide supervisor requires the Head of the IAIG to establish and maintain a group-wide strategy for reinsurance and other forms of risk transfer as part of the group-wide ERM framework that considers the following issues, as applicable:
  • the interaction with the group-wide risk and capital management strategies;
  • how the risk appetite is achieved, on both a gross limit and net retention basis;
  • the appetite for reinsurer credit risk, including approved security criteria for reinsurance transactions and aggregate exposure criteria to individual or related reinsurers;
  • the autonomy afforded to individual insurance legal entities to enter into “entity specific” reinsurance arrangements, and the management and the aggregation of these exposures in the group-wide context;
  • procedures for managing reinsurance recoverables, including required reporting from insurers;
  • intra-group reinsurance strategy and practice;
  • use of alternative risk transfer, including capital markets risk transfer products; and
  • effectiveness of risk transfer in adverse circumstances.​

​CF 16.7.c.1    
A strategy for other forms of risk transfer may include the use of capital markets risk transfer products (for example, insurance linked securities). Strategic considerations may include factors like the maturity of the capital markets offering such risk transfer products, regulatory approaches regarding the use of such risk transfer products, and overall mix of traditional reinsurance with other forms of risk transfer.

​Group-wide actuarial policy​

CF 16.7.d     
The group-wide supervisor requires the Head of the IAIG to establish and maintain a group-wide actuarial policy, as part of the group-wide ERM framework, that consists of a set of group-wide practice standards, covering at least:
  • the process to assess the appropriateness, at the group-wide level, of the data, methodologies and underlying models used, as well as the assumptions made in the calculation of technical provisions;
  • the process to calculate reinsurance recoverable assets taking into account the design of the reinsurance programme under the reinsurance strategy of the IAIG; and
  • model risk management of internal models that generate actuarial and financial projections for solvency purposes.

​CF 16.7.d.1     
The group-wide practice standards comprising the group-wide actuarial policy should:
  • be compliant with applicable laws and regulations, accounting regime, and professional actuarial standards;
  • formalise materiality thresholds to trigger higher levels of management actions to ensure well-governed activities;
  • provide for a data validation process that supports actuarial activities to ensure data quality, comprehensiveness, granularity and timeliness;
  • provide a framework for determining assumptions used in valuations, including a process of incorporating the experience of the IAIG and its insurance legal entities, as well as a process of developing assumptions if the IAIG does not have enough experience in a particular business line or market;
  • articulate model validation and maintenance procedure to ensure that model usage and model modifications align with the risk appetite and risk limits structure; and
  • create consistent management information requirements from in-depth reviews and monitoring of actuarial activities.

​CF 16.7.d.2    
The group-wide actuarial policy should contain practice standards to raise awareness of matters that have, or are likely to have, a materially adverse effect on the solvency, reserves or financial condition of one of the insurance legal entities, or the IAIG as a whole. Such standards would prompt the group-wide actuarial function to inform the relevant Board, Senior Management or Key Persons in Control Functions, as appropriate, for suitable action (see ICP 8 Risk Management and Internal Controls).

​CF 16.7.d.3    
Differences in reporting may exist at the insurance legal entity level to comply with jurisdictional requirements. The group-wide actuarial policy should focus on group-wide reporting requirements, both for internal management purposes and for reporting and disclosure purposes. The group-wide reporting should reflect jurisdictional differences.

​CF 16.7.d.4    
The group-wide actuarial policy should require an assessment of the consistency of the base assumptions used to derive technical provisions compared to those used to derive capital requirements, economic capital models, or the forward-looking view in the ORSA. Such an assessment of consistency may provide insight as to the coherence of the base assumptions and those applied in stress conditions.

​CF 16.7.e    
The group-wide supervisor requires the group-wide actuarial function, as part of the group-wide ERM framework, to report (whether certified or not) to the IAIG Board annually on at least the following:
  • a prospective actuarial analysis of the financial condition of the IAIG which goes beyond the current balance sheet of the IAIG;
  • the reliability and sufficiency of the technical provisions;
  • ​the adequacy of reinsurance credit for technical provisions; and
  • ​consideration of non-insurance legal entities and non-regulated legal entities.

​CF 16.7.e.1     
The group-wide actuarial function should provide the IAIG Board an actuarial analysis of the current and future financial condition of the IAIG given recent experience and the group-wide policies for underwriting, claims management and investment and the group-wide reinsurance strategy.

CF 16.7.e.2    
The group-wide actuarial function may use the underlying actuarial reports submitted by the individual insurance legal entities as input to its annual reporting to the IAIG Board. Further examples of issues that could be addressed include:
  • the assumptions used by all of the insurance legal entities in the group and the consolidation/aggregation method applied at the group level;
  • the methodologies used to determine current estimates by each insurance legal entity and the consolidation/ aggregation method applied at the group level;
  • the methodologies used to determine the margin over current estimate by each insurance legal entity and the consolidation/aggregation method applied at the group level;
  • the availability and appropriateness of data used in valuations;
  • back-testing of assumptions and valuations;
  • uncertainty in current estimates used by both insurance legal entities and at the consolidated/aggregated group level;
  • the adequacy of pricing, taking into account the underwriting policies, at the appropriate unit level, the insurance legal entity level and the group level;
  • the performance of the IAIG's insurance portfolios and analysis of any changes in business volumes, exposures, claims experience, mix of business and pricing during the year;
  • asset-liability management under the group-wide investment policy;
  • suitability and adequacy of reinsurance or other forms of risk transfer arrangements, taking into account the strategies for underwriting and claims management, as well as the overall financial condition and risk appetite of the IAIG; and
  • the extent of reliance on the values provided by non-insurance legal entities.

16.8

The supervisor requires the insurer’s ERM framework to address liquidity risk and to contain strategies, policies and processes to maintain adequate liquidity to meet its liabilities as they fall due in normal and stressed conditions.


16.9
The supervisor requires, as necessary, the insurer to establish more detailed liquidity risk management processes, as part of its ERM framework, that include:
  • liquidity stress testing;
  • maintenance of a portfolio of unencumbered highly liquid assets in appropriate locations;
  • a contingency funding plan; and
  • the submission of a liquidity risk management report to the supervisor.


Own risk and solvency assessment (ORSA)


16.10
The supervisor requires the insurer to perform regularly its own risk and solvency assessment (ORSA) to assess the adequacy of its risk management and current, and likely future, solvency position.


16.11
The supervisor requires the insurer’s Board and Senior Management to be responsible for the ORSA.


16.12
The supervisor requires the insurer’s ORSA to:
  • encompass all reasonably foreseeable and relevant material risks including, at least, insurance, credit, market, concentration, operational and liquidity risks and (if applicable) group risk; and
  • identify the relationship between risk management and the level and quality of financial resources needed and available 
and, as necessary:
  • assess the insurer’s resilience against severe but plausible macroeconomic stresses through scenario analysis or stress testing; and
  • assess aggregate counterparty exposures and analyse the effect of stress events on material counterparty exposures through scenario analysis or stress testing.


ORSA - economic and regulatory capital


16.13
The supervisor requires the insurer to:
  • determine, as part of its ORSA, the overall financial resources it needs to manage its business given its risk appetite and business plans;
  • base its risk management actions on consideration of its economic capital, regulatory capital requirements, financial resources, and its ORSA; and
  • assess the quality and adequacy of its capital resources to meet regulatory capital requirements and any additional capital needs.


ORSA - continuity analysis


16.14
The supervisor requires:
  • the insurer, as part of its ORSA, to analyse its ability to continue in business, and the risk management and financial resources required to do so over a longer time horizon than typically used to determine regulatory capital requirements; and
  • the insurer’s continuity analysis to address a combination of quantitative and qualitative elements in the medium and longer-term business strategy of the insurer and include projections of its future financial position and analysis of its ability to meet future regulatory capital requirements.


Recovery Planning


16.15
The supervisor requires, as necessary, insurers to evaluate in advance their specific risks and options in possible recovery scenarios.

16.15.1    
The supervisor may require an insurer to produce a recovery plan that identifies in advance options to restore the financial position and viability if the insurer comes under severe stress (see Application Paper on Recovery Planning). In deciding whether it is necessary to require a recovery plan, and the form, content and level of detail of such recovery planning, the supervisor should take into account, for example, the insurer’s complexity, systemic importance, risk profile and business model. A recovery plan is intended to serve the insurer as an aid to sound risk management. Additionally, if the insurer comes under severe stress, a plan may serve the supervisor as valuable input to any necessary supervisory measures.

16.15.2    
The supervisor should require the insurer to provide the necessary information to enable the supervisor to assess the robustness and credibility of any recovery plan required. If the supervisor identifies material deficiencies in the plan, it should provide feedback and require the insurer to address these deficiencies.

16.15.3    
The supervisor should require the insurer to review any recovery plan required on a regular basis, or when there are material changes to the insurer’s business, risk profile or structure, or any other change that could have a material impact on the recovery plan, and to update it when necessary.

CF 16.15.a    
The group-wide supervisor requires the Head of the IAIG to:
  • develop a recovery plan that identifies in advance options to restore the financial position and viability;
  • review and update the recovery plan on a regular basis, or when there are material changes; and
  • take actions for recovery if the IAIG comes under severe stress.

CF 16.15.a.1    
The group-wide supervisor should consider the IAIG’s nature, scale, and complexity when setting recovery plan requirements, including the form, content and detail of the recovery plan and the frequency for reviewing and updating the plan.

CF 16.15.a.2    
Recovery planning is the responsibility of the IAIG. The IAIG should be able to take timely actions for recovery, in particular when any pre-defined criteria are met that trigger the activation of the recovery plan.

CF 16.15.a.3    
A recovery plan developed by the IAIG should cover all material legal entities within the group.

CF 16.15.a.4    
A recovery plan should serve as a guide for the IAIG to plan and manage severe stress scenarios, although the actual nature and timing of recovery actions will depend on the circumstances.

CF 16.15.a.5    
The IAIG should ensure that:
  • it has a robust governance structure and sufficient resources to support the recovery planning process, which includes clear allocation of responsibilities; and
  • recovery planning is integrated into the IAIG’s overall governance processes.

CF 16.15.a.6    
A recovery plan is an integral part of the risk management process of an IAIG, aimed at identifying actions to be taken in severe stress scenarios that pose a serious risk to the viability of the IAIG, or any material part of its insurance business. A recovery plan describes if and how the IAIG would:
  • discontinue or divest certain portfolios, business lines, legal entities, or other services; and/or
  • continue operating certain lines of insurance business while restructuring or running off its discontinued business lines in an orderly fashion.

CF 16.15.a.7    
A recovery plan should include:
  • a description of the legal entities covered by the plan, including their legal structures, interdependencies, core business lines and main risks;
  • a description of functions and/or services that are significant for the continuation of the IAIG (for example, shared services, such as information technology services and outsourced functions);
  • pre-defined criteria with quantitative and qualitative trigger points, governance, escalation mechanisms and supporting processes;
  • a range of severe stress scenarios, including both idiosyncratic and market-wide stress
  • credible options to respond to severe stress scenarios, including actions to address capital shortfalls and liquidity pressures, and to restore the financial condition of the IAIG, taking into account intra-group transactions;
  • assessment of the necessary steps, costs, resources and time needed to implement the recovery actions, including the risks associated with the implementation of the actions; and
  • strategies for communication with stakeholders.

CF 16.15.a.8    
Pre-defined criteria should be well-defined and aligned with contingency plans. They should include qualitative and quantitative criteria, such as a potential breach of a prescribed capital requirement (PCR). Criteria may also include triggers based on: liquidity, market conditions, macro-economic conditions, and the insurer's operational conditions.

CF 16.15.a.9    
Possible actions for recovery include:
  • strengthening the IAIG’s capital position, such as recapitalisations;
  • capital conservation, such as cost containment and suspension of dividends and of payments of variable remuneration;
  • reorganisation of corporate structure and divestitures, such as sales of legal entities or portfolios;
  • voluntary restructuring of liabilities, such as debt-to-equity conversion; and
  • securing sufficient diversified funding and adequate availability of collateral in terms of volume, location and quality.

CF 16.15.a.10    
As a recovery plan may not be able to cover every possible scenario, the IAIG may take, or the group-wide supervisor may require the IAIG to take, measures for recovery other than those contemplated in the IAIG’s recovery plan.

CF 16.15.a.11    
The group-wide supervisor should regularly review the recovery plan, including the predefined criteria, the assumptions and severe stress scenarios underlying the plan, to assess its credibility and likely effectiveness. Where necessary, the group-wide supervisor should provide feedback and require the IAIG to address any material deficiencies.

CF 16.15.b    
The group-wide supervisor requires the Head of the IAIG to have and maintain group-wide management information systems that are able to produce information relevant to the recovery plan on a timely basis.

CF 16.15.b.1    
The IAIG may rely on an existing information system, so long as it fulfils the objectives of producing information relevant to the recovery plan on a timely basis.

CF 16.15.b.2    
It is important that the IAIG has available the information necessary for executing recovery actions when needed. Some of this information may be similar to the information needed for resolution; however, recovery may also require other information (see ComFrame material under ICP 12 Exit from the Market and Resolution).


Role of supervision in ERM for solvency purposes


16.16
The supervisor undertakes reviews of the insurer's ERM framework, including the ORSA. Where necessary, the supervisor requires strengthening of the insurer’s ERM framework, solvency assessment and capital management processes.