In my previous post, I discussed the effectiveness of a risk-adjusted operating model (RAOM) as a useful tool for insurers. However, a number of elements need to be considered in order to generate the full benefits of a RAOM. One of the key components of a successful transformation is the implementation of a capital optimization and steering approach which covers all phases, from planning, to evaluation and monitoring, and, finally, to execution.
This is where risk-adjusted performance management (RAPM) comes into play. By building risk-adjusted key performance indicators (KPIs) into the framework, insurers are able to steer operations based on the formulated risk appetite.
RAPM can provide management with invaluable information about the different sources of value creation and, ultimately, the company’s key value drivers. With the information provided by RAPM, expensive and scarce capital can be allocated to businesses, products and risks providing the maximum opportunity to add or generate value.
Accenture has developed an overall Enhanced Risk Performance Measurement Framework with detailed KRI/KPI definitions (see figure below), which can be fully integrated into risk-based capital management and can be aligned with risk and financial reporting systems.
While the use of KRIs can help implement RAPM, in our view changes in the performance management and evaluation framework are needed to fully transform the existing operating model to a RAPM.
We expect insurers will be able to realize some substantial benefits through the introduction of RAPM, including:
- Process integration
- Financial impact ― volatility, returns
- Productivity enhancement
- Process automation
- Data ― improved information and drill-back
- Technology/tool enablement
- Quality and content improvement
It is important to remember that in order for a risk management model to be effective, insurers must pay careful attention to economic capital evaluation. My next post will illustrate the positive results of implementing risk-based capital optimization as part of insurers’ economic planning.
To learn more, download: Risk-Adjusted Operating Model: Transformation Strategy for Insurers.