The insurance industry’s approach to risk management evolved significantly after the global financial crisis. Regulatory frameworks like the NAIC’s Own Risk and Solvency Assessment (ORSA) have been established to analyze the financial risk and solvency of insurance companies. In this Best’s Review article (subscription required), Milliman’s Anthony Dardis and Matt Killough discuss how actuaries have participated in this process since the financial crisis.
Here is an excerpt:
Anthony Dardis, a Milliman consulting actuary who focuses on life insurance, has seen increased actuarial involvement in the risk (and other) functions of life insurance organizations since the financial crisis.
“Even in advance of the financial crisis, we were seeing a lot more actuaries getting involved in what was genuinely the risk management side of things. But when the financial crisis hit it really accelerated that development. Prior to the financial crisis, a number of companies were doing economic capital modeling. But before the crisis those analytics were not getting very widely used. Another big development that’s worth highlighting is that the financial crisis really indicated there was something of a broken link between product pricing and risk management.”
That problem surfaced among some variable annuity writers, “who weren’t capturing all their risks in their pricing and were genuinely undervaluing the options that were inherent in the product,” Dardis said. “The flip side of this is that other companies did have strong risk management and pricing approaches in place pre-crisis and came out of the crisis very well, and in some cases used the aftermath of the crisis to pick up market share and grow their companies. Generally, the industry has made great progress since the financial crisis in the management of variable annuities with complex guarantees, although there is still more to do in terms of having relevant risk metrics produced quickly and properly understood and acted on by senior management.”
In addition, Dardis said, “There’s been a much more general trend toward bringing together risk, actuarial, finance, (company) treasury and investments and an increased recognition that these disciplines are all interrelated. There had traditionally been a real disconnect between the investment side and the actuarial side and again we’ve seen a lot of very positive developments in that area over the past few years.”
The financial crisis has had less of an impact on actuarial practice in the property/casualty industry, said Matthew Killough, a Milliman consulting actuary who focuses on the property/casualty segment.
“In general, the risks faced by property and casualty companies tend to be driven more by their insurance business than their asset portfolios,” he said. “Consequently, the industry weathered the financial crisis pretty well, but it did bring greater focus and attention to risk management and capital modeling. However, I believe we are still in the early stages of those efforts, and don’t think the financial crisis had a huge impact on the practice of most casualty actuaries.”