U.K. insurers still need to improve risk management, regulator says

U.K. insurers have improved their risk management practices since 2003, but they still have a lot of work to do, according to the U.K. insurance industry’s regulator, the Financial Services Authority (FSA).
The FSA’s most recent report, Insurance Sector Briefing: Risk Management in Insurers, is a study undertaken this year as a follow-up to the FSA’s 2003 review. It noted risks such as volatile investment conditions, increases in mortality risks, terrorism and climate change have all combined to raise the awareness among insurers of the need for sound risk management arrangements.
“We first reviewed insurers’ risk management practices in 2003 and at this time they were under developed,” the FSA said in its report. ” Since then, it is clear some significant and encouraging progress has been made.
“However, we also recognize that firms may have dealt with the areas most easily addressed and that the further development that is needed will inevitably prove challenging. For many firms, moving from the identification and measurement of risk to the management of those risks in their day-to-day business operations is no easy task.”
The report noted the FSA’s move to a risk-based capital adequacy regime has acted as a catalyst for change. “But capital should not be viewed as the panacea for risk management practices,” the report adds.
The report lists five areas for boards and mangers to consider in evaluating their risk management arrangements:
Governance and oversight: Board members often lack the specific experience required to self-assess their own risk management skills.
Risk appetite: Most firms have documented their approach to risk management through risk policies, procedure manuals and risk appetite statements. But, the FSA says, “there is a big step between defining and applying risk appetite, particularly for operational risk.”
Implementing risk management: “Risk management activities often lack consistency of approach or are disproportionately focused on particular risk areas,” the FSA noted. “Inadequate challenge on risk issues may limit the extent to which the board, senior management and the FSA can rely on outputs.”
Management information: “Lack of insightful analysis in many firms restricts the ability of management to identify trends and appropriately prioritize risk mitigation activity,” the FSA noted.
Risk-based capital adequacy: There is still a lot of work for firms to do in this area, the FSA reported, particularly when it comes to “board and management understanding of risk-based capital.”