Friday, April 27, 2018

Could do better

Risk management is being taken more seriously among insurers in Asia, but too many boards across the region still doubt the value of making upgrades to their processes.

Even among companies that are seen as trendsetters, there remain weaknesses to address, according to a Milliman risk management report into global best practices and challenges in Asia, written by Shoaib Javed Hussain, Pingni Eng and Jessica Pang.

“Even where senior sponsorship is observed,” say the Milliman authors, “many companies struggle with driving the effort through to completion and quite a few risk management processes are in need of some substantial improvement to deliver a more compelling value-added proposition.”

Some of the key challenges in Asia include building a business case to obtain senior ownership and buy-in; establishing risk management frameworks with clear ownership and responsibility; creating quantitative risk assessments and reporting for all key risk exposures; attracting and retaining the right staff talent and skills; and embedding risk considerations in senior management performance measurement.

Seeing risk management simply as a way to control losses is the most basic approach, while more advanced businesses are proactive in identifying important business risks and formalising an enterprise risk management (ERM) programme that allows for a degree of risk-return optimisation.

The majority of business in Asia are at one of these stages, according to Milliman’s survey of leading life insurers in the region. But the ultimate goal is to create value and to incorporate risk management practices as an important consideration in the overall strategic planning process.

“The goal of ERM is that everyone, in some capacity, becomes a risk manager,” said one survey participant.

However, not all risk officers agree with this evolution towards a value-driven approach. Almost a quarter of those surveyed strongly disagreed that their performance objectives should be tied to metrics such as corporate earnings, efficient capital allocation and profitable growth.

In the long run, they are not likely to get their way — there is increasing recognition globally of the value that can be created by strong risk management frameworks and it seems inevitable that this is the direction the industry is headed in. As they move in this direction, more companies are incentivising the right risk behaviours by building risk-related performance indicators into the compensation structures of senior management and material risk takers.

“This level of sophistication is not yet commonplace in Asia, as many companies are still struggling to evolve their ERM programmes beyond a qualitative state,” says Milliman. “This is a necessary interim step before ERM efforts can be integrated into capital and strategy analytics as well as to drive behaviours.”

To this end, two-thirds of the participants said they have increased the budgets devoted to the risk function during the past year, mostly to increase headcount for the risk team. But even increasing headcount is easier said than done.

Operations at regional Asian hubs such as Singapore and Hong Kong find it much easier to attract skilled staff, whereas recruitment poses a far greater challenge for local Asian entities. Training can address such problems, but adds to the cost of developing the risk management function.

Even so, it is clear that investing in better frameworks can help to create value, while also making the business much more effective at responding to a rapidly changing risk environment.

As Milliman concludes: “As the world of risk and risk management continues to evolve, it is important to remember that risk management processes and activities can offer immediate value to the business while evolving and becoming an embedded strategic partner to the business over time.”

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