Operational risk management in the short-term insurance industry and risk based capital
Loading...
Authors
Le Roux, Martin Charles
Issue Date
2011-05-05 , 2009 December
Type
Research Report
Language
en
Keywords
Risk management , Short-term insurance industry , Risk based capital
Alternative Title
Abstract
Operational risk management has been identified as one of the primary risk types
that short-term insurance companies will have to deal with on a rigorous basis in the
future. The implied future importance of operational risk management to short-term
insurance companies has come about due to the South African Financial Services
Board’s decision to develop and institute a new solvency regime for the South African
short-term insurance industry.
The South African Financial Services Board has decided to implement a risk based
capital approach to insurance company solvency requirements in line with
approaches adopted in the European Union. The new proposed risk based capital
solvency requirements are being designed to ensure that insurers have sufficient
capital to withstand adverse events, both in terms of insurance risk, as well as in
terms of economic, market and operational risk. A key divergence from the current
capital regime is that under a risk based capital approach insurers will have to put
rigorous risk management strategies into practice and to consider all the risks that
may affect their business, including operational risks, and not only the underwriting
risks.
Under the current solvency regime many insurance companies pay scant attention to
operational risk. Solvency Assessment and Management aims to create a more
realistic measure of solvency capital requirements based on all the risks an insurer
faces, including all categories of risk and in particular bringing in the effect of
operational risk.
In light of the above, this study, which consists of a literature review as well as
experiential research in the form of a survey, was conducted:
• To identify and present the various elements, practices, processes, techniques
and methods that can and should be recognised, considered and employed by
insurers in terms of their operational risk management programmes.
• To investigate insurers current approaches, as well as their recommended views,
towards the recognition, consideration and use of various elements, practices,
processes, techniques and methods employed in operational risk management practice.
• To investigate whether insurers approaches and views towards operational risk
management, and their recognition, consideration and use of various elements,
practices, processes, techniques and methods employed in operational risk
management are being significantly altered by the current importance being
attached to operational risk management as part of the requirements of the
Solvency Assessment and Management risk based capital regime being
implemented in 2014.
The literature review delineated operational risk as being the risk of loss resulting
from inadequate or failed internal processes, people and systems or from external
events; and operational risk management as consisting of a continuing process of
operational risk identification; measurement and evaluation; mitigation and control;
and monitoring and reporting by means of various practices, processes, techniques
and methods of operational risk management.
The results of the research indicate that insurers approaches and views
towards operational risk management, and their recognition, consideration and
use of various elements, practices, processes, techniques and methods
employed in operational risk management are being significantly altered. In the
majority of instances, insurers current approaches towards the recognition,
consideration and use of various elements, practices, processes, techniques
and methods employed in operational risk management practice differed
significantly from their recommended views. It is this author’s opinion that a
major contributor to this phenomenon is the current importance being attached
to operational risk management as part of the requirements of the Solvency
Assessment and Management risk based capital regime being implemented in
2014.
Due to operational risk management in the short-term insurance industry being a
relatively new concept still in a developmental stage, it is this author’s opinion that
this study could assist short-term insurers with founding formal operational risk
management processes and programmes within their organisations, and key
recommendations are: A structured approach to operational risk management should be instituted by
short-term insurers.
• In line with a structured approach, the framework, practices, processes,
techniques and methods identified and described by this study should be
implemented by short-term insurers in designing and instituting their own
operational risk management programmes.
• The adoption / institution of a structured, formalized operational risk management
programme / processes should be commenced as soon as possible so that
insurers can begin managing the operational risks inherent in their businesses to
an optimal level.
• The adoption / institution of a structured, formalized operational risk management
programme / processes should be commenced as soon as possible so as to
integrate operational risk management processes and practices as well as an
operational risk management culture into insurers businesses well in advance of
the implementation of the SAM risk based capital regime.
• The adoption / institution of a structured, formalized operational risk management
programme / processes should be commenced as soon as possible so that
insurers are in a position to comply regulatorily with the pending SAM risk based
capital regime which is being implemented on the 01st of January 2014.
• The adoption / institution of a structured, formalized operational risk management
programme / processes should be commenced as soon as possible so that
insurers have practiced, embedded and integrated structured operational risk
management processes and practices into their businesses to such a degree that
they are able to completely satisfy the regulator’s (FSB) requirement of the
insurer’s operational risk management programme passing a “use” test at the time
of the introduction of the SAM risk based capital regime on the 01st of January
2014.
The main recommendation for further study emanating from the research is for
research to be conducted on insurers approaches towards operational risk
management at the time of the Solvency Assessment and Management regime
implementation on 01st January 2014, to assess their levels of institutionalization of
formal operational risk management programmes at the time.