Top 10 ideas insurers include in their risk appetite

Just last week, I was talking to an old friend who now works in the risk appetite department of a large company. I asked him how their process worked and was floored to hear him tell how the risk appetite for each business unit of the company was based upon the level of risk that they “felt comfortable” taking and holding. No science, no statistics and not even any business considerations – just their feelings.

Perhaps that is the key reason why so many U.S. insurance executives struggle with framing appropriate risk appetite and tolerance statements for their firms. They are used to making business decisions with their heads, but they are being told that this concept, that is fundamental to ERM, is made in the heart.

In 2016, Willis Re performed a study of 48 (mostly U.S.-based) insurer risk appetite and tolerance statements; we found that this conflict between the head and the heart has many different solutions.

From our findings, we identified 30 different ideas that were included by two or more insurers in their risk appetite and tolerance statements. The most common ideas were included in less than 60% of the statements and only four of the 30 ideas were found in more than half of the statements!

It is clear that these 48 insurers did not all work off of the same template; they are actually expressing their own, independent opinions about how they will follow their hearts in risk management, and how they will express their risk preferences and limits. The average insurer included only 8 of the 30 concepts.

Here are the top 10 ideas found in the 48 statements:

Top ideas found in risk appetite statements

# Concept Percent Definition
1 Linkage between strategies, risk and risk management 55% A broad statement that risk appetite and risk management are consistent with business strategies or plans, usually with few specifics.
2 Overall security objective 43% Any simple verbal statement about their overall security (or surplus) objective.
3 Diversified investments 35% Over a third of insurers felt that it was important to say that this was a vital part of their risk management strategy.
4 Risk trajectory or targets 33% A qualitative statement of where they are headed – towards strengthening, weakening or balancing risk and capital.
5 Primary strategies for major risk categories 25% Insurers point out that they will have different strategies for different categories of risks, such as exploit, manage, minimize or avoid.

Top ideas found in risk tolerance statements

# Concept Percent Definition
6 Surplus – risk limit 57% Often stated in terms of the overall risk metric. Sometimes used another metric.
7 Rating 55% Companies said that maintaining a rating was part of their risk tolerance.
8 Regulatory 55% Statement about maintaining compliance with regulatory capital requirements.
9 Surplus loss limit 48% Most often stated as a percentage reduction in surplus that was the maximum loss that could be tolerated.
10 Risk metric used 48% Most often value at risk. Several insurers using total exposure.

Other top concepts found in the risk tolerance statement were

  • limits to individual risks
  • operational risk limits
  • the importance of monitoring risk levels
  • the time frame over which risk is assessed

Fewer than one in four insurers in the study included any mention of which risks they will write, even though that idea is suggested in the NAIC ORSA Guidance Manual. In a 2014 global study performed by Towers Watson, a similar list of ideas was found in insurer risk tolerance statements:

  • Regulatory capital threshold 90% of responses
  • Economic capital threshold 81%
  • Risk of breach of regulatory capital threshold 70%
  • Liquidity coverage ratio (normal conditions) 67%
  • Liquidity coverage ratio (stressed conditions) 66%
  • GAAP or IFRS earnings volatility 59%
  • Risk of reduction in GAAP or IFRS earnings 57%
  • Rating agency capital threshold 52%

Parts of this post are excerpted from an article that first appeared in

About Dave Ingram

Dave is an Executive Vice President of Willis Re, specialising in theory and practice of ERM for insurers. Based in…
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