Risk Management

In Order that everybody speaks a common language and to avoid misunderstandings with the aim to anchor adequate governance within the company it is necessary to define some roles and functions as follows.

1. Risk owner     : Executive committee, through setting limits and appetite for risks and approving risk policies & governance, owns the risks, through the delegation of authority and responsibility for these risks through the company’s management processes.

2. Risk taker/Line Management : The business functions (product/operation/distribution) through writing business and implementing the risk policies and governance framework as well as management controls, take risks. In addition, corporate functions take risks, e.g. Finance through its balance sheet and control management activities.

3. Risk controlling & reporting  : The risk specialist functions, through identification of emerging issues, creation of risk policies, and review of the business function, provision of management information and consolidated risk committee/executive committee reporting, perform core controls in the risk management process. The chief risk officer, through periodical review of any part of the risk assurance matrix as he deems appropriate, performs additional controls.

4. Independent assurance   : Internal audit, through their audits of process and policy compliance by both business functions and risk specialist, provide independent (from management / risk committee) assurance that framework is compiled with.

5. Risk policy    : The risk policies are governance documents with the aim to ensure that an adequate risk frameworks is in place for a certain type of risk. These documents are prepared by the risk management function (second line of defense) and they are adopted by the risk owners. Risk policies are published by the chief risk officer. The company sets the risk appetite for the business. For most of the policies the implementation is the responsibility of the line management.

6. Policy owner   : The policy owner is the manager within the first line of defense who is responsible for the corresponding policy in the business.

About Insuarance

       Life Insurance is the key to good financial planning. On one hand, it safeguards your money and on the other, ensures its growth, thus providing you with complete financial well being. Life Insurance can be termed as an agreement between the policy owner and the insurer, where the insurer for a consideration agrees to pay a sum of money upon the occurrence of the insured individual’s or individual’s death or other event, such as terminal illness, critical illness or maturity of the policy.

       Life insurance plans, unlike mutual funds, are beneficial when you look at them as a long term avenue of investment which also offers protection through life cover. Life insurance policies are broadly categorized into 2 types, Traditional plans and Unit Linked insurance plans.

      Traditional policies offer in-built guarantees and define maturity value. The investments risk in traditional life insurance policies is borne by life extent by IRDA rules and regulations, ensuring stable returns with minimal risk Investment income is distributed amongst the policy holders through annual bonus. These policies are ideal for policy holders who are not market savvy and do not wish to take investment risks.

     ULIPs, on the other hand provide a combination of risk cover and investment. More importantly they offer a flexibility to decide your risk taking profile.

Insurance Liabilities

            In this it is not possible to describe & value all possible insurance liabilities & hence we should to focus on the most important life insurance liabilities. We can distinguish between insurance liabilities where the policyholder assumes all risk & consequently invest in funds. Here the value is normally quite clear & so we can focus on life insurance forms with investment guarantees. In this case the majority of the investment risk is born by the insurance company. From a conceptual point of view life insurance cover behaves very similar to a bond. In principle one agrees some payments, which have to be weighted with the corresponding probabilities. In the following we want to introduce the corresponding concepts.

            Insurance liabilities can be valued according to a book value or a market value principle. In the first case future cash flows are discounted using discount rates based on the technical interest rate i. in Europe this rate is determined in as prudent way & should according to the 3^rd life insurance directive normally not exceeding 60% of the yield of governance bonds. So if we assume that governance bonds in EUR yields 4%, the maximal technical interest rate would be 2.4%. In reality the rule is interpreted in a somewhat more ingenious way & one looks for example at rolling averages of yield of government bonds. Based on the technical interest rate a payment of 1 due in one year is discounted with v = 1/1+i. So here the value approach yields to higher liabilities representing a prudent valuation approach.

            In this section we will also focus on the market valuation on a best estimate basis. This is the first step to determine the market value of an insurance liability. We assume however that the insurance cash flows are certain. Since there is in reality a risk involved, it will be necessary to revisit the concept of market values for liabilities later. We will see their how risk enters in the valuation & how we can use this knowledge for risk adjusted performance metrics.