The risk-based capital model may be integrated into the day-to-day business of a traditional company. To obtain a risk-sensitive framework, insurers should consider including business models, governance, processes and IT infrastructure in this integration. As a result, the transformed models are risk-adjusted and the processes are risk-driven as the figure below demonstrates:
A group-wide risk-based capital model will benefit insurers in the following manner:
- The capital planning process is a core element of the risk-adjusted operating model (RAOM) transformation.
- The risk-based capital model allows for risk and risk appetite as additional strategic objectives for the company.
- The required capital can be compared to the defined risk appetite objectives to help see whether they are attainable based upon the simulated business plan.
Capital allocation models
- The planning process can move from group level to the business units, which allows the adoption of consistent processes based on RAOM principles.
- The capital absorbed can be measured by the different business units, and may be analyzed based on the results obtained in terms of the defined risk-adjusted performance management (RAPM).
- Insurers may promote value by increasing their stake in profitable business units while reducing it in low-profit units.
Risk policies and limits based on risk appetite and business standards
- Risk policies set out the requirements for the level of risk the firm is willing to take.
- Risk policies can interlink risk appetite and business standards.
- Risk policies should consider products (including life and non-life insurance), investment management, operational risk and the firm’s own risk management framework.
- Risk policies are divided among business standards focusing on processes and procedures required for all business areas.
A risk-adjusted operating model such as the one developed by Accenture can help firms integrate risk management into core operations, capital management and business processes. This, in turn, can help insurers maximize enterprise value by allowing their management to invest in projects or business units that are profitable after taking into account the cost of needed capital. The risk-adjusted approach can enable “de-risking” by reducing some of the firm’s exposure to high risk products and/or portfolios in favor of those with more favorable risk/return metrics.
To learn more, download: Risk-Adjusted Operating Model: Transformation Strategy for Insurers.