MARK MENNEMEYER: Hello. Welcome to (Re)thinking Insurance. I'm your host,
Mark Mennemeyer, and today we're talking about key priorities for life
insurance chief risk officers. I'm joined by two of our risk experts, Phil
and Niamh. Thanks, both of you, for being here. I'd like to start by asking
you to introduce yourselves and describe your background in this topic. And
then just for fun, let's get to know you a little bit better and also stay
on theme. So as you do, could you tell me about one of the riskiest things
you've ever done? And Phil, maybe I'll let you go first.
PHILIP TERVIT: Yeah Thanks, Mark. And hello, everyone. I've been with WTW
for two years now, but in the industry for over 20. I'm a specialist in
risk, finance, and transformation. And I guess, particularly importantly in
this topic, I've been a CRO for the last couple of years for a client and
support the risk proposition on behalf of WTW.
The riskiest thing? That's an easy one for me. I had a near-death
experience whilst diving with my wife in search of hammerhead sharks. The
sharks turned out to be absolutely fine. But rather, my wife's oxygen tank
bashed my head at some 30 meters below surface and I lost my own air
supply. So that was really scary, and I'm told, entirely unintentional.
MARK MENNEMEYER: That's terrifying. But I'm glad that you made it through
OK to tell us about it. So thanks. Thanks for being here. Niamh, over to
you.
NIAMH CARR: Thanks, Mark. So I'm Niamh Carr. I'm Deputy Lead of our UK and
Ireland Life Consulting Team, and I've been with WTW for over 20 years now.
And in that time, I've focused on both risk and Capital Management, and I
currently lead our UK and Ireland Risk and ESG proposition.
In terms of the riskiest thing I've ever done, one of the riskiest things
is I did a freefall abseil down the ArcelorMittal orbital sculpture in the
London Olympic Park a few years ago. And that's the UK's tallest sculpture.
And it was as part of a WTW group raising money for charity. It felt quite
risky going out over the edge. But in practice, I think it was probably an
example of really good risk management. The safety equipment was brilliant.
But the view was amazing over the Olympic Park. It was an incredible thing
to do.
MARK MENNEMEYER: Sounds perfect. Let's start with some of the basics. Phil,
if you want to kick us off, tell us, what is risk management in life
insurance, and why are we talking about it today?
PHILIP TERVIT: Yeah. Very simply, life insurers act to provide insurance
against life events when a customer needs them, whether it's
health-related, such as a personal accident or death. But it also includes
retirement provisioning in the form of pensions. Life insurers I guess,
essentially are in the business of taking on risk in exchange for a premium.
And therefore, risk management itself is a fundamental component of the
business. And we're talking about it today because risk management in life
insurance is complex, it's evolving, and we believe there are pertinent
matters to consider in the year ahead.
MARK MENNEMEYER: And because risk is so fundamental to the insurance
business model, insurers clearly have dedicated risk management functions
themselves. Can you explain more about that structure and how it works?
PHILIP TERVIT: Sure. Many of our listeners will be familiar with the three
lines of defense model adopted in financial services. Risk are the second
line of defense, headed up by the chief risk officer and comprised
typically by a range of financial, operational, and compliance experts. And
whilst this podcast will focus on the CRO and his or her team, risk
management and life insurers is relevant to first-line functions such as
marketing, operations, and finance, too. Ultimately, risk management starts
with the first line.
MARK MENNEMEYER: Great. Thanks for that. So let's get more specific into
the world of the CRO I understand you maintain a list of CRO top 10 issues.
Could you describe that for us?
PHILIP TERVIT: That's right. That's something I hold dearly. The CRO's got
a lot to juggle in trying to steer their firm safely through a myriad of
complexities they face. And we maintain a CRO top 10 as a way to focus on
the very biggest issues that we believe the majority of life insurers are
facing into.
Where does the list come from? Well, we spend a lot of time and effort
scanning the market and the related regulation. We have regular client
engagements. So in some ways, the top 10 reflects their issues and
challenges and plans. And also host risk events such as CRO dinners and so
on and so forth. So it's informed by those many inputs.
And we'll go through the top 10 in a moment or two, but I should add that
this list changes. New regulation comes to market. External environment
changes arise beyond the insurance industry and into societal changes. And
risks can also evolve by means of one's own business strategy changing and
evolving over time. And also, I should say, the focus today is on life
insurance, but some of these equally evolve and play into the general
insurance market.
MARK MENNEMEYER: Niamh, let's shift over to you. Could you take us through
the current list of the CRO top 10?
NIAMH CARR: Yes, of course. So the first three are really focused on the
external environment in which we operate. And they are the exposure to the
external and geopolitical global market, cyber risk, and climate risk. The
next four relate to regulatory focus. So they are regulatory capital
reform. So this is focused on Solvency UK and Solvency II reform in the UK
and Europe. But also, there's many other regulatory changes taking place
globally with a focus on capital.
The fifth is making sense of IFRS 17. The sixth is customer outcomes
leading to regulations such as consumer duty and operational resilience in
the UK. And then the seventh is model risk. Then we come on to aspects
related to the insurer's strategy, the eighth being liquid assets as
insurers invest in more and more private assets to back their liabilities.
And the ninth, looking at new products and underwriting.
And finally, the last of the 10 is the risk framework itself. So this is
where the onus falls upon the CRO to ensure that the firm has an effective
risk framework on which it can safely execute its strategy. So for example,
they need to have a clear risk appetite and risk limits to manage certain
exposures. And this is really likely to always be in the top 10, as the CRO
needs to ensure that this is operating effectively all the time.
MARK MENNEMEYER: Yeah, that's quite a good list, and clearly there's a lot
there. Could we delve into a few of them more specifically, and why they're
important in 2024?
NIAMH CARR: Yeah. So looking at the first of these, the impact of the
current external and geopolitical environment is clearly very important. So
we've seen that the impact of the war in Ukraine together with the lasting
effects of the pandemic have led to a turbulent few years with higher
inflation leading to increases in interest rates and significant economic
uncertainty, and this seems set to continue in 2024.
So we face ongoing conflict in the Middle East, together with elections
taking place in over 50 countries around the world. And this means that
CROs will need to continually consider the wider potential implications of
geopolitical risks on an insurer's risk profile, both economic and
operational. What might be a bit easier to predict are the impacts of
regulatory capital reforms.
So in the UK, the Solvency UK reforms have been well communicated, with
changes to the risk margin coming into effect at the end of 2023 and
matching adjustment reforms due in the middle of 2024. However, we still
wait to see the full details of how the regulators implement these changes
with significant work for some risk management functions required to
support MA attestation.
PHILIP TERVIT: I was just going to add in a little bit there that's related
to this, which is around model risk. And in its widest sense, model risk to
me is the risk that the calculation kernels. For example, actuarial
valuation models or day-to-day tools such as Excel use to produce key
information to stakeholders are unreliable. Or more bluntly, the key numbers
reported by the life insurer are incorrect due to the data calculations or
process involved.
So what we've seen in the UK-- but this does apply wider, is a key focus on
this. And indeed, there's been a recent supervisory statement to the UK
banks. Whilst not a new challenge for life insurers in 2024, what we do see
is a variety of levels of maturity in the market in terms of addressing
model risk in the business. And couple that with a clear intent by the
regulator-- it is foreseeable that this is an area that will require
investment to raise the bar in this year and into next.
MARK MENNEMEYER: And what's in it for the insurer to make that kind of an
investment?
PHILIP TERVIT: For me, strong model governance provides greater confidence
in reported results. Whether it's Solvency II or IFRS 17 quotes on new
business acquisition pricing or numbers communicated in letters or online
to your customers, it's not uncommon to see material errors in reporting.
And these can and have had real business consequences and need rework as
well as redress, for example. And all too often, firms only implement
strong model governance once they have made a material error.
MARK MENNEMEYER: OK. And Phil, back to you. What's not in the CRO top 10?
PHILIP TERVIT: For me, the CRO runs a wider framework upon which they seek
to help guide the business through of foreseeable regulatory change and
business change and so on. But what they will also have within their
capability is the need to monitor emerging risks. Or horizon risks can also
be a term that's used.
And there, you've got a much wider myriad of risks that could impact the
business, some of which have high velocity and could impact quickly. And
those sometimes garner quite a lot of specific mitigants or reactions that
need to be either already up their sleeve or ready for implementation. Or
indeed, just having the set of tools that with which to respond should you
need to.
So we do a lot of work with firms around what is the emerging risk process,
and also how do you make that most effective, and therefore leading into
recovery and resolution should such risk events arise? Because you can bet
your bottom dollar, the risk event that does arise will be slightly
different to any that you've potentially foreseen or modeled in advance.
One such example-- and there are many, but something that is increasingly
coming both from horizon into more near-term type consideration is
generative AI and how that is impacting the business. Or indeed, being used
by the business, and whether that's a sort of asset, or is it a risk? It's
certainly a topic that needs to be considered more fully.
MARK MENNEMEYER: Niamh, one of the items in your list was climate risk. Can
you expand more on what life insurers need to consider in this regard?
NIAMH CARR: Yeah. So climate risk is actually an example of a risk that has
been on emerging risk registers for a long period of time, and there's
quite a lot of debate about whether it's emerging or emerged. But actually,
I think what's important is actually to consider what the potential impacts
on the business could be rather than debate about that debate.
I think the use of scenario analysis is a really impactful way of
considering the potential impact of emerging risks, and help businesses
react quickly when unforeseen events do occur. And insurers and reinsurers
have spent quite a lot of time and effort looking at climate-related
scenarios and the potential impact on their business. And this has been
driven by regulatory pressure and shareholder pressure, but also quite a
lot of internal stakeholder interest.
But what we have seen is that there has been some discussion recently about
how useful that scenario analysis has actually been. So recent publication
from the Institute of Faculty of Actuaries noted that many climate scenario
models are actually underestimating climate risk, and that regulatory
scenarios-- so those scenarios that are consistent scenarios-- they have the
benefit of being consistent across insurers. But they also introduce the
risk of groupthink and outcomes being taken too literally and out of
context.
What we have seen is that the focus of most life insurers' investigations
into climate change has been on the impact of physical and transitional
risks on asset portfolios without considering the potential impact on
liabilities. So I think there's more work to be done in looking at climate
scenarios and more work for risk function to be involved in that. And we
have seen recently an increasing number of life insurers and reinsurers
have started to turn their attention to the liability side. For example,
considering how variations in climate might affect mortality. And we expect
this to continue in 2024.
MARK MENNEMEYER: Thanks for that. Another item in the list was IFRS 17. And
by the way, for the US listeners, although the details are different, I
would imagine that from a risk perspective you could be thinking about GAAP
LDTI and still hit many of the same points. So could we talk about this a
little bit more? And Phil, maybe that's a good one for you, if you could
explain IFRS 17 from the CRO lens?
PHILIP TERVIT: Certainly. So most of our listeners will have some awareness
of IFRS 17, which is the new IFRS insurance standard. So unless exempted
or, as you illustrated, from a US perspective, insurers globally are
adopting this new standard to report their earnings with a view to
consistency and transparency in the market. It's been a long time coming,
and our recent global survey of over 300 firms suggests there is much more
to do to complete the job.
I guess as we talk today, much of the burden has fallen upon the finance
function to interpret the standard, implement new methodology and
assumptions, adopt new systems, and to cope with increased complexity in
the reporting, and ultimately prepare for audit standard results to the
market. So no easy task.
MARK MENNEMEYER: And so there must be a key role there for the CRO, correct?
PHILIP TERVIT: Yeah. What we've seen at this point in time is quite a varied
level of input from the CRO and the risk functions. Where our risk team are
heavily involved in risk and capital, and more generally prudential metrics,
is high, the involvement in accounting has typically been less direct. So I
think to some degree, that is now changing and I foresee the CRO and risk
functions getting more involved in IFRS 17 than they have been to date. And
here's a few reasons.
Firstly, the new IFRS standard contains more judgment than previous IFRS
standards. And where there's judgment, I would typically see a greater level
of oversight. There are also closer parallels to regulatory reporting-- for
example, Solvency II-- than before. So there is overlap to consider. And
thirdly, I mentioned model governance before. And IFRS 17 results are
externally reported, and hence key. And as such, I would expect a risk
function to have a view over model reliability.
Again, the parallels globally, depending on where our listeners are-- things
like Sarbanes-Oxley would also be of relevance here. So from a control
perspective, that could be another key reason for the CRO to have an
increased involvement before. So I guess if you're in a risk function and
you're feeling like right now, you're not as close to IFRS 17 as you would
like, that's the comments we are hearing and feeling. But think that will
change in 2024 as it becomes ever more a priority in the wider firm outwith
finance.
MARK MENNEMEYER: Yeah. That makes a lot of sense. Thanks for that. One more
in the list that I'd like to dig into a bit deeper-- customer outcomes.
Could you both help to explain that one a little bit more? And Phil, maybe
start with you?
PHILIP TERVIT: Sure. Forgive me, this is from a UK regulatory angle. But I
think some of this is being seen more globally as well. But from a UK
perspective, the regulator is currently very focused on consumer outcomes,
and they've rolled that out in the form of what's called the consumer duty.
And the consumer duty introduces a new consumer principle, which requires
firms to act to deliver good outcomes for retail customers. It goes further
in placing an onus on firms to equip their customers, to make effective
decisions in their interests.
So why is this important? Well, you'll see rhetoric along the lines of this
being a paradigm shift in delivering a higher standard of customer care and
protection in the market. So that's a key backdrop. The regulator's heavily
focused on this, and it's leading to actions of insurers in the UK market.
So it's a topic that alone garners its own podcasts and articles, some of
which are available on the WTW website. But a really key focus into 2024.
NIAMH CARR: And I think linked to this is regulation around operational
resilience. So this is focused on the ability of insurers to adapt and
respond to operational disruption. So in the UK in particular, the
Financial Conduct Authority is focusing on the potential impact on
consumers. So for example, if disruption leads to claims not being paid.
And quite a lot of work has been done in the UK on this to date with risk
functions being heavily involved in designing operational resilience
frameworks and putting in place impact tolerances. So the focus is moving
into line one with the need to embed operational resilience and business
operations, but risk will have an ongoing role in reviewing and challenging
line one on these aspects. And their regulations on operational resilience
are being brought into other jurisdictions as well, for example, in
Ireland. So this is an ongoing area of focus for risk functions as well.
PHILIP TERVIT: Is it worth to say, I think it's a really helpful framework,
Niamh, in as much as what firms are being asked to do is articulate what
their important business services are. So if for, example, you're an
annuity writer, you've got a really important customer business service to
pay your annuitants there essentially the income upon which they rely each
month.
And then you're being asked to scrutinize what parts of the chain in
delivery of that monetary payment to your customer could fall over. And if
it were to fall over, what can you do to readily stand that process back up
again? So it's proven to be quite a helpful framework upon which to really
scrutinize what your areas of weakness could be.
MARK MENNEMEYER: Yeah. It's very interesting. Thanks for describing that.
So drawing the podcast to a close, there is a lot for the CRO to be
thinking about in 2024. Any final thoughts that either of you want to
share?
PHILIP TERVIT: I guess today we've discussed the CRO top 10, and these are
likely to be on many the planning lists for the coming year and things to
keep on top of. And that is no easy task, but I've always learned to leave
a bit of extra capacity for the unexpected. And so the external or internal
events that will occur-- we can only hypothesize about these right at the
start of the year. And there will be things that arise that we don't
foresee, so leaving the capacity for the unknowns is key.
NIAMH CARR: So for me, I think if you look at the top 10, it shows just the
wide variety of issues that insurers are dealing with. But also, as we see
CROs take on more of a strategic role within insurers, that the risk team
have a pivotal role in providing guidance, oversight, and counsel on these
topics. And this variety for me means that personally, I think it's quite an
exciting time to be involved in risk management.
MARK MENNEMEYER: Well, Phil and Niamh, thanks again. It was great to hear
your perspectives. And to all of our listeners, thanks for joining us.
We'll catch you again on the next episode of (Re)thinking Insurance.
PHILIP TERVIT: Thank you.
NIAMH CARR: Thank you.
SPEAKER: Thank you for joining us for this WTW podcast featuring the latest
perspectives on the intersection of people, capital, and risk. For more
information, visit the Insights section of wtwco.com. This podcast is for
general discussion and/or information only. It is not intended to be relied
upon, and action based on or in connection with anything contained herein
should not be taken without first obtaining specific advice from a suitably
qualified professional.
