Chinese insurance companies need to significantly improve their understanding of the risks they are taking on and how to manage them, according to a survey by Towers Watson.
The 2013 Risk Management Healthcheck survey of the Chinese life insurance industry focused on companies’ risk governance, monitoring and reporting frameworks. It also looked at key areas of the business operations where risk can easily arise, such as, product development, management and pricing, distribution, customer management, investment management and people (or human resources).
While the survey revealed that more than 40% of participants use some risk management information in their strategic planning, capital management, asset/liability and reinsurance processes, approximately one-in-seven companies does not reference or monitor risk management information in their decision making processes at all.
“We see that for many companies the basics are in place, but a lot of work is still required in order to successfully integrate risk management information into day-to-day and strategic decision making, thereby helping companies to further build the secure, sustainable industry that policyholders and investors want.” concluded Adrian Liu, the General Manager of Towers Watson’s Life Insurance Consulting Business in China. Risk Governance and Reporting Frameworks
The survey findings showed that while the majority of companies have established risk governance and reporting frameworks, they have done little work to define their risk appetites. In fact, 43% of participants only use simple low, medium or high risk ratings in their risk appetite statement.
“Being clear on your risk appetite and articulating this is fundamental to effective risk management. Without it, companies cannot determine whether risks are good or bad, or within tolerable limits, and if the risks they take on are aligned with their overall objectives, and in the best interests of their stakeholders,” said Penny Fosker, who leads Towers Watson’s Enterprise Risk Management services in Asia Pacific. “Importantly, having a well thought through risk appetite framework is also in compliance with emerging regulatory requirements in China.”
Product Development, Management and Pricing
The survey revealed that the majority of companies have well defined product development processes in place with clear ownership and assigned responsibilities, but product management processes are less well defined. 86% of companies do consider the impact of introducing a new product on operational processes, but only 22% perform any quantitative analysis of the associated financial and insurance risks, using some form of risk based capital assessment. Introducing more advanced risk assessment approaches into product development, management and pricing processes will help companies to ensure that risk profiles are aligned with their risk appetite and company strategy.
Putting in place a process to regularly monitor and review a range of appropriate metrics could reduce distributor fraud risk considerably. Almost 50% of respondents indicated that they left it to distributors to monitor their own conduct, and only 30% monitor the financial standing of their distributors.
Most companies have clearly identified target customer segments, which are aligned to company strategy, however only 34% have embedded customer segmentation within the organisation’s core activities such as product development and marketing. If this is done, and done well, it can improve the focus on selling the most relevant products to the most profitable customers, reducing the likelihood of customers surrendering their policies, and also perhaps more importantly, the possibility of mis-selling issues arising.
The survey also revealed that whilst most companies have defined competency structures and performance management programmes in place for their staff, less than 50% tailor them to specific roles, and even fewer incorporate any risk management metrics.
“Company strategy and risk appetite are not well reflected in performance management practices or incentives,” said Kannie Kong, Towers Watson’s General Manager for Rewards, Talent & Communication in China. “Improvements in competency structures, performance management programmes and incentive schemes will lead to companies having the right people with the right skills in the right roles, and that they will be incentivised to make decisions in line with the overall objectives of the firm.”
Market forces interact differently under normal and stressed conditions. The survey shows that although 51% of companies calculate and monitor basic investment risk metrics at the asset class and product level, only 27% monitor tail risk in addition to using symmetric measures, or analyse portfolio risks into the various risk premia. Introducing more comprehensive investment management processes and forward looking risk models will help companies to better identify, assess and allocate investment risks in today’s challenging environment.