EIOPA Insurance Risk Dashboard: Risk exposures for the European insurance sector – July 2019

Risk exposures for the European insurance sector remain overall stable.

Macro and market risks are now at a high level due to a further decline in swap rates and lower returns on investments in 2018 which put strain on those life insurers offering guaranteed rates. The low interest rate environment remains a key risk for the insurance sector.

Credit risks continue at medium level with broadly stable CDS spreads for government and corporate bonds.

Profitability and solvency risks increased due to lower return on investments for life insurers observed in year-end 2018 data; SCR ratios are above 100% for most undertakings in the sample even when excluding the impact of the transitional measures.

Market perceptions were marked by a performance of insurers’ stocks broadly in line with overall equity markets, while median CDS spreads have slightly increased. No change was observed in insurers’ external ratings and rating outlooks.

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Macro risks are now at a high level. Since the April 2019 assessment, swap rates have further declined for all the currencies considered (EUR, GBP, CHF, USD). The indicator on credit-to-GDP gaps has deteriorated due to a more negative gap in the Euro area. Key policy rates remained unchanged and the rate of expansion of major central banks’ (CB) balance sheets is now close to zero. Recent monetary policy decisions suggest that some degree of monetary accomodation is still to be expected for the forseeable future.

Credit risks remained stable at medium level. Since the previous assessment, spreads have remained broadly stable for all corporate bond segments except financials (unsecured). The average credit quality of insurers’ investments remained broadly stable, corresponding to an S&P rating between AA and A, while the share of below investment grade assets remains limited.

Market risks are now at a high level. Volatility of the largest asset class, bonds, remained broadly stable compared to the January’s assessment, whereas equity market volatility spiked in June 2019. Newly available annual information shows a decline in the spread of investment returns over the guaranteed rates to negative values in 2018, mainly due to lower investment returns. The mismatch between the duration of assets and liabilities remained broadly stable in the same period.

Liquidity and funding risks remained stable at medium level. Liquidity indicators have remained broadly unchanged since the previous quarter, while funding indicators such as the average ratio of coupons to maturity and the average multiplier for catastrophe bond issuance increased.

Profitability and solvency risks remain at medium level but show an increasing trend. This is mainly due to newly available data on the return on investments for life solo undertakings, which was considerably lower in 2018 than in the preceding year. SCR ratios are above 100% for the majority of insurers in the sample even when excluding the impact of the transitional measures on technical provisions and interest rates. The proportion of Tier 1 capital in total own funds remains high across the whole distribution and the share of expected profit in future premiums in eligible own funds is below 15% for most undertakings in the sample.

Interlinkages and imbalances risks remained at medium level in Q1-2019. A minor increase is observed for exposures to banks, while the opposite is true for exposures to other financial institutions. An increase has been reported in the share of premiums ceded to reinsurers.

Insurance risks remained constant at a medium level. Median premium growth of life and non-life business remains positive and a reduction has been reported in insurance groups’ loss ratios and cat loss ratios.

Market perceptions remained constant at medium level. Insurance groups stocks’ performance was broadly in line with the overall market. Median insurers’ CDS spreads have increased, while external ratings have remained unchanged.

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Click here to access EIOPA’s Risk Dashboard July 2019

Financial Risk Management – Global Practice Analysis Report

Survey participants indicated they are involved in the daily practice of financial risk management as financial risk managers, in supervisory roles, as consultants, academics and trainers, auditors and regulators. They self-identified as highly educated — 71 percent hold a Master’s degree or higher. While 61 percent of respondents had more than five year’s experience in the financial services industry, less than half — 41 percent — had more than five year’s experience in financial risk management. This indicates that experienced financial services professionals enter the field of risk management from other areas of responsibility at financial institutions.

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More than 40 percent of respondents worked at banks, with consulting and asset management firms employing 17 and 16 percent, respectively. Approximately one-third of respondents hold the title of risk manager, one-quarter are analysts and 11 percent are consultants. Approximately 61 percent are employed at firms with more than 1,000 employees.

The GARP Global Practice Analysis survey addressed 49 specific tasks across six process-based domains. Respondents were asked to assign an importance rating from 1 (not important) to 4 (extremely important) to each task. Significantly, all 49 tasks were found to be important on the 4-point Importance Scale, meeting the industry best-practices threshold of 2.5 out of 4. Forty-seven of the 49 tasks received a mean importance rating of at least 3.0, indicating that these tasks are considered of moderate to high importance to the work of financial risk managers.

The top five tasks identified by respondents as most important, earning a mean importance rating of at least 3.3 among all survey respondents, are to:

  1. Identify signs of potential risk based on exposure, trends, monitoring systems regulatory and environmental change, organizational culture and behavior.
  2. Analyze and assess underlying risk drivers and risk interconnections.
  3. Communicate with relevant business stakeholders.
  4. Monitor risk exposure in comparison to limits and tolerances.
  5. Evaluate materiality of risk and impact on business.

The five tasks identified as least important, with a mean importance rating of or below 3.0 among all respondents, are:

  1. Create and inventory of models.
  2. Generate, validate, and communicate standardized risk reports for external purposes.
  3. Develop transparent model documentation for independent replication/validation.
  4. Set capital allocations and risk budgets in accordance with risk management framework.
  5. Recommend policy revisions as necessary.

Respondents were asked to identify at what level of experience each task should be part of the financial risk manager’s profile, according to a five-level Experience Scale:

  • Not necessary
  • Less than 2 years
  • 2 to 5 years
  • 6 to 10 years
  • More than 10 years

One-half of respondents indicated that financial risk managers should be able to perform all 49 tasks within the first five years of practice.

More than 77 percent of respondents said financial risk managers should be able to perform these specific tasks within their first five years of practice in financial risk management:

  • Monitor risk exposure in comparison to limits and tolerances
  • Define and determine type of risk (e.g., credit, market, operational) by classifying risk factors using a consistent risk taxonomy
  • Gather quantitative data to perform model evaluation
  • Select monitoring methods and set frequency (e.g., intra-daily, daily, weekly, monthly)
  • Gather qualitative information to perform model evaluation
  • Generate, validate, and communicate standardized risk reports for internal purposes (e.g., staff, executive management, board of directors)
  • Identify risk owners
  • Investigate why limits are exceeded by performing root-cause analysis
  • Analyze and assess underlying risk drivers and risk interconnections
  • Escalate breach when limits or alert levels are exceeded according to risk management plan/policies/strategies
  • Generate, validate, and communicate ad hoc reports to meet specific requirements
  • Escalate unusual behavior or potential risks according to risk management plan/ policies/strategies

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Financial risk managers are vital to any integrated financial system of managing and communicating risk. The GPA study is a contemporary and comprehensive description of the work of risk managers across work settings, geographic regions, job roles and experience levels.

The process of a practice analysis is important for programs that desire to continually evolve and reflect the critical knowledge and tasks in the industry. It is important for practitioners who desire to evolve and be successful in their career.

Click here to access GARP’s detailed survey report