Insurance sector needs to improve risk appetite, finds latest FSA briefing

The UK regulator’s latest review of risk management by insurers states that insurance firms need to implement risk management in daily business operations.

The insurance sector needs more work to improve its risk management practices despite substantial progress since the 2003 implementation of the Individual Capital Adequacy Standards (ICAS), according to the FSA’s latest insurance sector briefing.

'Risk Management in Insurers' states that while the industry has made significant progress with identifying and measuring risk, firms must work to manage risk on a day-to-day basis.

Sarah Wilson, the Financial Services Authority (FSA) director responsible for the insurance sector, said the definition and application of risk appetite was the most problematic area identified in the review.

“Compiling meaningful risk appetite statements appears to have posed significant challenges for a number of firms, particularly in relation to operational and strategic risks. So much so that we found only a few effective examples that were capable of being applied to the range of key decisions that firms would typically be taking,” said Wilson.

In total, the FSA identified five key areas for boards and senior management to consider:

• Governance and oversight – A board’s self-assessment of skills needs improvement in many areas. The regulator noted that although most firms have a more developed network of oversight committees, “frequently, members of those committees lack appropriate knowledge and experience to provide sufficiently informed challenge on risk matters.”

• Risk appetite – Risk appetite is not well understood in many firms to a level of clarity that provides a reference point for all material decision-making.

• Implementing risk management – “Risk management activities often lack consistency of approach, or are disproportionately focused on particular risk areas,” according to the briefing. “Inadequate challenge on risk issues may limit the extent to which the board, senior management and the FSA can rely on outputs.”

• Management information – A lack of insightful analysis restricts the ability of management to identify trends and appropriately prioritise risk mitigation activity.

• Impact of ICAS – The progress in the development of quantification techniques for risk-based capital met the FSA’s approval, but firms need to improve board and management understanding of risk-based capital.

Click here to see a copy of the sector briefing, and here to see Wilson’s speech.

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