Successful Risk and Capital Management
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Successful Risk and Capital Management James J. Schiro Zu¨rich Financial Services, Mythenquai 2, CH-8022 Zu¨rich, Switzerland. E-mail: [email protected]
For insurance companies, the road to successful risk and capital management entails having a measurement model that is not overly complex, the backing of the top management, appropriate changes in the compensation plans, and organizational change. The Geneva Papers (2005) 30, 60–64. doi:10.1057/palgrave.gpp.2510013 Keywords: risk and capital management; organizational change
The capital bases of many insurers were depleted by the combination of the 2002 stock market decline and persistently low yields on all bonds (and high-profile defaults on some). These in turn exposed significant shortcomings in risk and capital management at most insurers. Management, as well as our Boards and regulators, have had to face up to their organization’s inadequate understanding and quantification of the economic risks their businesses were taking on. There exists today a fundamental business imperative to regain this understanding. It is this imperative, not Solvency II or impending accounting changes, that is driving the insurance sector to look again at its risk and capital frameworks. And for this reason, the revised and refreshed frameworks that result will have an impact far beyond regulatory and reporting compliance. They will fundamentally transform the way we do business, and, eventually, the competitive landscape. Of course, such major change does not happen automatically. Fortunately, there is a huge body of literature covering the principles of successful change management. Many of these principles apply to changing risk and capital management frameworks. However, there is one extremely important difference with respect to insurers: risk and capital management is the core of what we do. It is how we meet our customers’ needs and create value for our shareholders. This means that textbook solutions will not suffice.
What is successful risk and capital management? At the highest level, a firm’s risk and capital management framework can be considered a success when decisions change – for the better – across a range of subjects and at various levels within the organization. At group level, this begins with executive management having a better picture of how much capital it is putting at risk and how much return is being/will be achieved in which business units. It further lays out whether these risks and returns are justifiable in terms of the firm’s current balance sheet, target solvency standard, and risk appetite. This leads ultimately to better decisions that go to the core of how group management creates value – by answering the big capital allocation questions: Where should we invest our capital? Where should we grow? And where shrink?
James J. Schiro Successful Risk and Capital Management
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But between this group-wide picture of risk profile and capital usage and the big, value-creating decisions lies a set of processes that also have to change, in some ca
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