A new study from Conning emphasizes the need for insurers to have a clear understanding of their risks and transparent processes in place to manage those risks.
“The collective effect of the forthcoming regulatory initiatives such as Solvency II, NAIC’s Solvency Modernization, ORSA, and others is an intensified focus on the key levers of solvency protection: increased risk capital and enhanced risk management,” said Alan Dobbins, analyst at Conning.
The growing level of activity among regulatory bodies and quasi-regulatory agencies focused on strengthening insurance solvency protection systems, particularly regarding increased risk capital and enhanced risk management, will force insurers to focus more attention on modeling their risks.
“To respond to these new regulatory structures and compete effectively under these new regimes, insurers will need to build sophisticated internal models to analyze their risks and, more importantly, to be able to present that view to regulators,” said Mary Pat Campbell, analyst at Conning.
The report asserts that all insurers with enhanced risk management practices will be able to compete more effectively “in an environment that increasingly demands more transparency and skill in navigating a global marketplace.” Indeed, regulatory pressures are not the only reason insurers should be evaluating risk; the study also points to the prolonged low interest rate environment as another reason companies should be stressing risk management.
Lastly, the report acknowledges threats these regulatory demands may pose, particularly to smaller insurers that may wait too long to prepare or not have the resources to comply. This is why, according to Campbell, “larger firms will have a clear advantage as they can support the modeling resources needed to respond, and will likely gain a capital advantage as a result.” Yet this consolidation could concentrate market risk, all the more reason for large insurers to invest in ERM practices early and often.
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