1、ERM Practice and Challenge in China Insurance Company,Zhang Chensong, FSA,CERA,FIA,FCAAHead of Risk Management Taikang Life Insurance,2,Agenda,ERM development in ChinaERM frameworkEconomic capital application Challenges in practice and going forward,3,Global Financial Crisis,In March, 2008, The Bear
2、 Stearns Company who exploded a liquidity crisis got purchased by Morgan Stanley,In September, 2008, Freddie Mac and Fannie Mae who had been exposed to four quarters continuous loss, were taken control of by US government. In September, 2008, the fourth biggest US investment bank, Lehman Brothers Ho
3、ldings experienced a 90% drop in its stock price within 9 months and required a bankruptcy protection. In October, 2008, The three biggest banks of Iceland went out of business completely and leaded Iceland to face national bankruptcy. In June, 2009, US GM announced its bankruptcy.In November, 2009,
4、 the biggest financial group of Dubai claimed the delay of debt reimbursement, and undertook a debt reorganization which reached a 59 billion USD high. And then the Dubai financial crisis erupted.In November, 2009, the national debt of Greece hit its historical high. The most three authorized rating
5、 agencies degraded the sovereign credit rate of Greece because of the worries of its debt crisis.In February, 2010, the Spanish government announced that its financial deficit accounts for 9.8% of GDP .In April, Spain and Portugal met a credit rating downgrade, which deepened the European debt crisi
6、s.,4,Solvency II,In 1997, Mullers report brought in the “Solvency I” plan and the “Solvency II” plan.,In 2002, EU achieves the expected objects of “Solvency I”,In 2000, the EU Commission and the Council of EU presented FSAP.,In 2001, the European Union formally launched the project of “Solvency II”.
7、,In 2003, KPMG and Sharmas report released.,Between 2006 and 2008, the research results of QIS were announced and the QIS5 research is undertaken in 2010.,The Solvency II is estimated to be implemented in 2012.,5,Risk Management Regulations for Insurance Industry In China,1999 Internal Control Direc
8、tive and Principle for Insurance Companies2004 Provisions on the Administration of Insurance Companies2004 The Guidelines for Risk Control in Investment of Insurance Companies 2006 Guiding Opinions on Regulating the Governance Structure of Insurance Companies2007 The Directive for Risk Management of
9、 Insurance Companies 2007 The Directive for Compliance Management of Insurance Companies2008 The Administrative Provisions on the Solvency of Insurance Companies 2008 The Basic Internal Control Norms for Enterprises2008 Classified Supervision of Insurance Companies Estimated in September, 2010Guidel
10、ines for Enterprise Risk Management in Life Insurance Companies,6,Guidelines for ERM in Life Insurance Company,Explicitly propose that life insurer should build up the three defenses for the enterprise risk managementRequire life insurance companies to establish the risk management committee as sub-
11、committee of the board of the directorsPropose that the companies should have a position that is Chief Risk Officer responsible for risk management controlExplicitly require that life insurance co. should have a risk management department which should be independent from sales, finance, investment,
12、actuarial, etc.Classify the risks of life insurance companies into 8 categories : market risk, credit risk, insurance risk, business risk, operational risk, strategy risk, reputation risk and liquidity riskFor the first time, state the Economic Capital model as the basis of risk quantitative measure
13、mentExplicitly propose that life insurance companies should establish effective risk appetite and toleranceExplicitly propose that life insurance company should build up an asset and liability management organizationPropose that life insurance company should build up KRI system,7,Current Status: Ris
14、k Management Governance,Early 2010, CIRC initiated a survey on “Risk management status of life insurance industry in China”. Questionnaires were released to all life insurance companies, health insurance companies and pension companies locate in China, and 35 valid replies were received. The result
15、indicated following points: Risk management organization - 25 companies have set up Risk Management Committee, and 14 of them are established at Board-Level. - 18 companies have person in charge of risk management , only 6 companies have the role of Chief Risk Officer. - 24 companies have set risk m
16、anagement department, but only 10 of them are independent, the rest of them are combined with other functions, such as compliance, legal, internal control and etc.,8,Current Status: Risk Management Fundamental,Risk management fundamental - 22 companies have established their own risks category - Onl
17、y 8 companies have built up EC model for risk quantification - 16 companies have tried to establish risk appetite and tolerance system, but still at the exploratory stage,9,Agenda,ERM development in ChinaERM frameworkEconomic capital application Challenges in practice and going forward,10,Current En
18、vironment,Risk Management Framework:Strategies and PoliciesOrganization and PeopleProcessesMethodologyReportingSystems & Data,Market Risk Management,Credit Risk Management,Insurance Risk Management,Operational Risk Management,Other Risk Management,Capital Management,External FactorsCustomer Expectat
19、ionUncertainBusinessEnvironmentFierceCompetition,RegulationSolvency IISOX COSORisk Management Directive,Internal DriversOversight from Shareholders and Board,11,ERM Process,Risk Assessment(Identifying and evaluating the risks),Risk Strategy(Developing risk strategy, design and implementing risk miti
20、gation plan),Risk Monitoring(Monitoring the implementation of risk management; reporting),Optimization (Improvement of risk management capabilities),Risk management framework(Establishing risk management process and a common language),Risk Management Information,Enterprise risk management is a proce
21、ss, effected by an entitys board of directors,management and other personnel, applied in strategy setting and across theenterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding theachieveme
22、nt of entity objectives.,12,ERM vs. Traditional Risk management,ERM,Traditional Risk management,Integration Approach,Communicate and evaluate the overall risk of the whole organization and consider the diversification,Risk and Opportunity,Consider both risk and opportunity,Control risk and hold oppo
23、rtunity,Managing Risk,Choose the strategy with optimal return for given risk tolerance to achieve the balance between risk and return,“Silo” approach,Each business unit just concerns its own risks without consideration of whole impacts and relations among risks,Only Risk,Only focusing on the risk pr
24、evention but not the opportunity catching,Controlling Risk,No actively manage risks and just control risk under certain restriction,13,Risk Control,Two Levels of ERM,Risk Identification Identify internal and external incidents that could affect the achievement of the companys goals. Risk Assessment
25、Assess the possible impacts to objectives from potential risks. Assess risks in two dimension: probability and impact. Risk Response Select and execute responses based on the results of risk assessment. Risk responses fall into the following categories: avoidance, mitigation, transfer and acceptance
26、. Risk Control and Monitoring Monitor the operation of enterprise risk management, the effectiveness of risk responses and the control activities,Risk Quantification Build risk model with consideration of risk diversification and quantify risk impacts Risk Pricing Consider risk and risk management e
27、xplicitly in the pricing process to ensure the price reflects the cost of risk. Risk Capital Allocation Allocate capitals to business line based on risk capital, setting up business plan with risk management plan. RAPM Apply risk-adjusted financial metrics in performance management process Integrate
28、d KRI within KPI,Strategic Risk Management,14,Three Defenses of ERM,The 1st defenseThe owners of risksIdentify, assess, response, control and report risksCollect the loss data and events,Board of Directors,Set the tone of the risk managementEstablish risk appetite and strategyApprove risk management
29、 framework, policies, responsibilities, etc.Take risk related information into decision making process, making decision of risk responses,Internal Audit,The 3rd defenseValidate the compliance of companys business lines Validate the risk management frameworkReview the implementation of risk managemen
30、t process, and provide improvement suggestion,The 2nd defenseDesign the ERM frameworkSupervise the business units accordance with the ERM framework and company strategyCoordinate risk management activities among business unitsRisk modeling and quantificationEstablish risk management policies and pro
31、cedures, monitor the implementationReport risks,Risk Management Committee and Department,Business lines,Function departments,Branches,Subsidiaries,15,Agenda,ERM development in ChinaERM frameworkEconomic capital application Challenges in practice and going forward,16,Uniform Risk Measurement,Economic
32、 Capital defined as the capital requirement to ensure companys daily operation and solvency even in extremely unfavourable environmentEC is the basic risk measurementEnable to focus on major risks from companys perspectiveApplied to the establishment of risk limitKey tools for risk measurement, capi
33、tal planning and managementConsiderable side-benefits in terms of risk transparencyEC is the complement to other customised tools, but not the replacementEC is not the substitute of risk management process,17,MARKET RISKLosses due to changes in market factors such as price, volatility,and correlatio
34、n factors,CREDIT RISKLosses due to changes in the creditworthiness of other entities,INSURANCE RISK Deviations of income due to unexpected claims and adverse developments of reserves,BUSINESS RISK Deviations of income due to unexpected business volumereduction,OPERATIONAL RISK Adverse impact to busi
35、ness as consequence of conducting it in an improper or inadequate manner,Quantifiable Risks Definition,Economic Capital Consistent and comprehensive risk measurement across quantifiable risks Value-at-Risk to a confidence level of 99% EC reported on a monthly basis for company,18,Market, Credit, Ins
36、urance RiskEC,Business Risk EC,Cost,Total EC,+,Current Status,Stress Scenarios,Result,Risks Involved,Revenue Streams,Balance Sheet,Profit,Operations,Calculated at a confidence interval of 99%,Calculated at a confidence interval of 99%,Calculated at a confidence interval of 99%,Erosion of MTMvalues o
37、f assets and increase of liabilities,Estimation of expense coverage from commission/fee and net interest income,Estimation of potentially operational loss event based on industry-wide historical experience,Operational RiskEC,+,=,=,Liability,Asset,Equity,Operations,Operational or external events,Impa
38、ct on other revenues and expenses,SignificantFinancial Crisis,Revenue,=,=,=,Calculation Framework,19,Key Applications:Risk Appetites,Set risk tolerance using EC Allocate risk tolerance to business lines and units as risk limit,Relationship of the elements of risk appetite system,RiskCapacity,Risk Ap
39、petite,Risk Tolerance,Risk Limit,The risk amount company is able to take,The risk types and amount company prefer to take,The maximum amount for single risk company accepts,The limit of KRI or limits for business units,20,Key Applications：Capital Managment,InsuranceRisk,Business Risk,OperationalRisk
40、,Capital Needs,Book Equity,Available Economic Capital,Total EC,Capital Resources,Divers.Benefit,NetAdjustment,CapitalAdjustment,Economic capital needed to support risk profile,Economic capital available to support risk profile,CreditRisk,MarketRisk,21,Key Applications：Performance Measurement,Risk ad
41、justed return of capital RAROC =Economic Return / ECMajor contributionsEconomic return as ultimate driver of shareholder valueRAROC captures fair value changes not reflected in accounting P/L RAROC not meant to replace other Key Performance Indicatorsperformance assessment in complex environment sho
42、uld never be done using just one measure purely internal measurecomplements other KPIs,22,Agenda,ERM development in ChinaERM frameworkEconomic capital application Challenges in practice and going forward,23,Drawbacks of Current Regulation Framework,Focus on “compliance”, but not “risk management”Rul
43、e-based but not principle-basedThe assessment is based on book accounting but not marked-to-market basis, which is inconsistent with IFRS as well as MCEVCurrent statuary minimum solvency margin doesnt account for risks properly,24,Practical Issues,China Insurance industry is growing rapidly, busines
44、s growth could be the unique goal and lack of risk awareness for many companiesRisk management is simply equated as internal control No historical loss data sharing mechanismOverlook the development of risk models,25,Challenges in Use of EC,Few companies had built up EC modelEC not be applied in dai
45、ly risk management No market consistencyCredit risk parameter determinationOperational risk quantification difficultiesRisks integration,26,Going forward: Regulation,CRIC should establish a new regulation system: Focus on risk management Principle based regulation Establish three pillars: solvency,
46、internal risk management and information disclosureInsurance companies should be required to build internal risk model according to their own risk profile other than the minimum statutory solvency requirement,27,Going forward: ERM framework,Insurance company should establish ERM framework as followi
47、ng:The framework should cover each business units and all types of risks. Board of Directors is ultimately responsible for the framework Senior management is responsible for the daily risk management operationAnd risk management department is responsible for the framework implementationRisk manageme
48、nt department is responsible for: ERM system establishment and maintenanceRisk management coordination among business unitsRisk identification and assessmentEstablish risk appetites system including risk appetite, risk tolerance and risk limitsBuild a risk reporting system and a database of risk eve
49、nts and losses,28,Going forward: EC Model,Use EC as the key internal risk quantification approachSensitivity analysis, scenarios analysis and stress testing as supplement risk measurementsApply EC model to pricing and investment strategyApply EC to risk limit settingAccomplish capital allocation based on EC, and implement risk-adjusted performance,
