How can you monitor and review risk appetite for insurance?

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Risk appetite is the amount and type of risk that an insurance company is willing and able to take in order to achieve its strategic objectives. It is influenced by various factors, such as the market environment, the regulatory framework, the stakeholder expectations, and the company's culture and capabilities. Monitoring and reviewing risk appetite is essential for ensuring that the company is operating within its desired risk profile and that it is adapting to changing circumstances. Here are some tips on how to monitor and review risk appetite for insurance.

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1 Define risk appetite and tolerance

Risk appetite and tolerance are two related but distinct concepts. Risk appetite is the overall level of risk that the company is prepared to accept, while risk tolerance is the specific amount of risk that the company can bear for each risk category, such as underwriting, credit, operational, or strategic risk. Both risk appetite and tolerance should be defined in clear and measurable terms, such as capital adequacy, profitability, solvency, or ratings. They should also be aligned with the company's vision, mission, values, and strategy.

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Ernest Kuzoe

International Speaker | Entrepreneur |Top Insurtech Voice | Insurance Ecosystem | Technology | Strategy| Business Development | | Host of Insurance Industrial Complex Podcast | EX-KPMG | EX-ACCENTURE | EX-MILLIMAN|
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Establish a robust framework comprising risk indicators, key performance indicators (KPIs), and regular risk assessments. Utilize data analytics and modeling to identify emerging risks. Engage in ongoing dialogue with stakeholders to understand their risk tolerance. Conduct periodic stress tests and scenario analyses to assess the impact on the portfolio. Regularly update risk appetite statements based on market dynamics and regulatory changes. Foster a risk-aware culture within the organization and adapt strategies accordingly. Embrace technology for real-time monitoring and reporting. Collaborate with internal and external experts to stay abreast of industry trends.

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2 Establish risk indicators and limits

Risk indicators and limits are tools that help the company monitor and control its risk exposure and performance. Risk indicators are metrics that measure the actual or potential impact of risk events on the company's objectives, such as loss ratios, claims frequency, or customer satisfaction. Risk limits are thresholds that define the acceptable range of variation for each risk indicator, such as maximum or minimum values, target ranges, or trigger points. Risk indicators and limits should be consistent with the company's risk appetite and tolerance and should be reviewed and updated regularly.

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3 Implement risk reporting and escalation

Risk reporting and escalation are processes that communicate the company's risk position and performance to relevant stakeholders, such as senior management, board of directors, regulators, or auditors. Risk reporting and escalation should provide timely, accurate, and comprehensive information on the company's risk profile, risk exposure, risk events, risk mitigation actions, and risk deviations. Risk reporting and escalation should also identify and escalate any issues or concerns that require attention or intervention, such as breaches of risk limits, emerging risks, or significant losses.

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4 Conduct risk reviews and assessments

Risk reviews and assessments are activities that evaluate the effectiveness and adequacy of the company's risk management framework, policies, procedures, and practices. Risk reviews and assessments should cover all aspects of the risk management cycle, such as risk identification, measurement, analysis, evaluation, treatment, monitoring, and reporting. Risk reviews and assessments should also involve internal and external stakeholders, such as risk owners, risk managers, risk committees, internal auditors, external auditors, or consultants. Risk reviews and assessments should be conducted periodically or on an ad hoc basis, depending on the nature and severity of the risk.

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5 Seek feedback and improvement

Feedback and improvement are essential for ensuring that the company's risk appetite and tolerance are relevant, appropriate, and effective. Feedback and improvement should involve collecting and analyzing data, opinions, suggestions, and best practices from various sources, such as risk reports, risk reviews, risk assessments, stakeholder surveys, industry benchmarks, or peer reviews. Feedback and improvement should also involve implementing and monitoring changes, enhancements, or corrective actions to the company's risk appetite and tolerance, as well as the risk management framework, policies, procedures, and practices.

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Rahul Kumar

Corporate Risk & Insurance Specialist, Multinational Programs, Risk Transfer Strategies
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This will always be an evolving matter within an organization which deserves periodic review. We are basically looking at Impact Vs Probability graph for key risk items to reassess the point at which it makes sense to supplement operational mitigation and control measures with a risk transfer (insurance) mechanism. The weights shift and internal as well as external factors to impact the assessment continuously. These may not necessarily translate into a frequent changes in policy, but at the very least, there will be fewer (unpleasant) surprises.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Rahul Kumar

Corporate Risk & Insurance Specialist, Multinational Programs, Risk Transfer Strategies
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Quite a few internal risk reviews may not result in immediate changes to operational and legal controls or risk transfer policy. Yet they present an excellent opportunity to engage with various stakeholders, take feedback and set reasonable expectations. As a risk/ insurance manager, you do not want to wait until a claim to advise business heads on attachment points (deductibles) and key exclusions in the risk transfer (insurance) program.

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Muralidaran Narayanaswamy

AGENCY PARTNER WITH KOTAK LIFE INSURANCE COMPANY LIMITED
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The term appetite itself refers to the level up to which anything could be managed and beyond which the same could be still accepted refers to optimum tolerance levels. In Insurance industry the appetite levels differs from person to person who are otherwise termed as Insured but the overall tolerance rests only with the Insurers. In particular in the above industry this risk is always related to the survival of the insured and again it differs individually.

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How can you monitor and review risk appetite for insurance?

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1 Define risk appetite and tolerance

2 Establish risk indicators and limits

3 Implement risk reporting and escalation

4 Conduct risk reviews and assessments

5 Seek feedback and improvement

6 Here’s what else to consider

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