A key focus of the insurance regulatory authorities around the world has been the protection of policyholder interest. This has resulted in more emphasis on product governance and product life-cycle management. The insurance directive launched under the European Union insurance law has issued guidelines for insurers to embed product oversight and governance into their risk management frameworks.
A robust product governance process can help reduce mis-selling and complaints, and increase policyholder confidence in the market. It can also ensure internal and regulatory compliance for the products offered by the insurer.
The core components of a robust product governance process are:
• Product governance policy
• Product development
• Pricing and value
• Distribution and sales
• Legal, compliance and risk management
• Ongoing assessment of the product
To read more about building a strong product governance policy, read Neha Taneja’s article here.
Few would debate the importance of recognising and addressing conduct risk. The recent increased attention it has received within the financial services industry has been largely driven by ever-strengthening conduct of business supervision. This paper by Milliman’s Emma Hutchinson and Jennifer van der Ree covers recent regulatory developments in the United Kingdom in relation to conduct risk. The authors also discuss best practice for robust conduct risk management frameworks.
Milliman’s Adam Schenck has been making the public speaking rounds. In this video Schenck, who is Managing Director, Portfolio Management at Milliman FRM, is interviewed by ETF Trends’ Tom Lydon about risk management strategies that can be built in to Exchange-Traded Funds (ETFs).
Schenck also spoke at the Global Financial Leadership Conference in November as part of a panel on the global market outlook and opportunities for the coming year. Led by CNBC’s Ron Insana, Schenck was joined by Societe Generale Chairman Lorenzo Bini Smaghi and Virtu Financial founder Vincent Viola.
For a number of years now, legislators from around the globe have poured huge energy and resources into assisting with the development, and in some cases complete reworking, of their prudential regulatory regimes. Local regulatory authorities have been similarly active in the implementation of these changes. Finally, the dust is starting to settle on this latest wave of change, with the likes of Solvency II for insurers now in place in Europe, and the Own Risk and Solvency Assessment (ORSA), in its various guises, firmly recognised globally as a key cornerstone of best practice when it comes to sound solvency management.
Now attention is slowly but surely starting to turn to conduct, the second key function of regulatory authorities, and legislators have become active again. Recent years have seen conduct risk push its way ever higher up the agenda. What do we mean by conduct risk though? The International Association of Insurance Supervisors (IAIS) has succinctly described it as ‘the risk to customers, insurers, the insurance sector or the insurance market that arises from insurers and/or intermediaries conducting their business in a way that does not ensure fair treatment of customers.’ The chair of the Financial Stability Board (FSB) has stated that ‘the scale of misconduct in some financial institutions has risen to a level that has the potential to create systemic risks.’ Such observations have served to further place conduct risk management in the spotlight, not just in the insurance industry but across the whole spectrum of financial services firms.
So what has been happening in this space? At a global level, the IAIS and the FSB have both been active. The IAIS has, through its Insurance Core Principles (ICPs), set out a number of key conduct requirements, namely suitability of persons (ICP5), corporate governance (ICP7), risk management and internal controls (ICP8) and conduct of business (ICP19). The FSB, charged with developing and promulgating global financial policies designed to minimise the likelihood of another financial crisis, has published a number of reports on measures to tackle misconduct in financial services. In May last year, it published a report setting out the next steps in its work to consider the role that governance frameworks have to play in reducing misconduct. It listed the following five themes as key elements of conduct risk management:
1. Clearly defined corporate strategy and risk appetite with relevant controls.
2. Appropriate expertise, stature, responsibility, independence, prudence, transparency and oversight on the part of board members and control functions.
3. Corporate culture.
4. Effective control environment.
5. Appropriate people management and incentives.
A strong risk management function within an insurance company allows threats to be managed and opportunities to be captured across every unit and level of the enterprise. Taking a holistic approach to risk enables organisations to optimally prioritise responses and allocate resources to manage risk exposures. It can also help identify significant risks that may have been overlooked through traditional compliance risk management practices.
Developing a risk management framework is an ongoing process that involves strategy and objective setting, risk identification, risk assessment, risk monitoring and risk incidence procedures. A well-defined framework addresses such items as the interaction of the executive risk management committee with the staff who are identifying risks, the criteria for measuring the likelihood and severity of risks and the design of questionnaires, workshops and other methods of identifying risks. With such a risk management programme in place, a company can improve the quality of internal and external customer service, protect its financial and human capital resources and safeguard the organisation’s reputation.
In this report, Milliman’s Shoaib Hussain, Pingni Eng, and Jessica Pang examine risk management best practices from their discussions with participants, global regulatory developments, and global Milliman perspectives. The authors also discuss key challenges and areas of focus for the development and evolution of risk management in Asia.
Risks relating to conduct of business are attracting increased attention across financial services firms, prompted by the ever-increasing focus of regulators in this area. Senior managers are accountable for conduct risk failings, and accordingly a strong conduct risk framework is an important tool in protecting against such failings. Based on our experience of assisting clients in this area, conduct risk management is still evolving and firms face many challenges. This paper by Milliman’s Karl Murray and Eamonn Phelan looks at recent and ongoing developments from around the globe and discusses actions firms need to take in order to address the changing business and legislative environment with regards to consumer protection.