A defined risk appetite should be at the heart of a mutual insurer

Our industry is well served with data regarding losses, portfolio metrics and market dynamics. On the other hand, until recently there has been a lack of information regarding risk appetite and its influence on the reinsurance decision-making process. But the risk appetite topic is an important one.

With rising regulatory and shareholder demands, increased pressure on insurer margins and a growing desire for a strong performance measurement framework from company stakeholders, a dramatic shift among insurers towards risk quantification and risk management is apparent. This trend is also affecting how reinsurance is being purchased.

A formal risk appetite statement is a written declaration of the aggregate level and types of risk an insurance company is willing to accept or avoid to achieve its business objectives. Their growing adoption within the industry and increasing influence on reinsurance purchasing were facts most recently highlighted by a global risk appetite survey conducted by Willis Re.

The survey gathered responses on risk appetite and reinsurance decision making from more than 240 companies around the world, from across 48 countries.

Almost two-thirds (64%) of insurers that participated in the survey specified they have a formal risk appetite statement in place

Undertaken in 2015, with the results published earlier this year, this was the first time a study on risk appetite statements and their influence has been conducted for the insurance industry and it highlighted some interesting trends.

  1. First, almost two-thirds (64%) of insurers that participated in the survey specified they have a formal risk appetite statement in place. A further 17% said they are planning to develop one in the near future.
  2. Second, of those insurers that confirmed they have a risk appetite statement, the vast majority (87%) said they are using this to drive reinsurance decision-making.

As a consequence, centralised buying of reinsurance – at a company rather than business line level – is now widespread, with insurers increasingly linking their reinsurance strategies to their company’s formal risk appetite statement to achieve corporate objectives and competitive advantage. Indeed, 86% of companies within the Willis Re study said the final reinsurance purchasing decision is now being made by top executives within the firm rather than by individual product line heads.

Risk appetite and mutuals

Out of the 241 participants in the risk appetite survey, 41 identified themselves as “mutuals” (in this study shorthand for any policyholder-owned entity, including co-operatives, mutuals, risk retention groups and pools).

Drilling into these results, it was interesting to find compared to the overall survey average of 64%, only 55% of mutuals reported having a risk appetite statement.

This undoubtedly follows the trend whereby publicly held companies are the most likely to have a risk appetite statement (85%, according to the survey), which is unsurprising, given the heightened investor and shareholder demands for clarity about targets and risk tolerances.

All mutuals that have yet to set a risk appetite statement should be looking to do so

However, while it is true mutuals may not have the same requirement to be as proactively explicit about their risk tolerance compared to publicly traded companies, a formal, clearly defined risk appetite statement is nonetheless extremely beneficial to provide macro-level guidance to underwriting, risk retention and cession strategies, all of which are fundamentally important to a mutual where capital is provided by member insureds.

The International Co-operative Alliance, the apex organisation for co-operatives worldwide, lists seven core principles for all co-operatives and mutuals, including voluntary and open membership; democratic member control; autonomy and independence; education, training and information; co-operation among co-operatives; concern for community.

The third of these principles revolves around promoting the economic participation of members, saying: “Members contribute equitably to, and democratically control, the capital of their co-operative.”

A clear statement of risk appetite is central to empowering stakeholders across all types of risk-taking insurance enterprises. With this principle in mind, it would seem particularly relevant for stakeholders who are both policyholders (who naturally rely on their insurer to pay their claim) and member/owners in what is ultimately a collective or mutual insurance venture.

Indeed, a risk appetite statement will enable such stakeholders not only to better understand the venture they are involved in, but also to participate democratically in the control and governance of their mutual.

As such, not only because of the advantage for setting macro-level guidance to underwriting, risk retention and cession strategies, but given this apex principle, all mutuals that have yet to set a risk appetite statement should arguably be looking to do so.

 


 

This post was originally published in Insurance Day May 25, 2016.

About Robin Swindell

Robin is Executive Vice President & Regional Director of Willis Re. Robin works in the London office as part of…
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