The Development of Enterprise Risk Management and Supervision for Insurance Companies in Taiwan

Dr. Huang, Tien-MuDirector General, Insurance Bureau

Financial Supervisory Commission, R.O.C.

Agenda

The Concept of ERM

IAIS ERM Guidance

Risk-Based Supervision in Taiwan

Future Perspective

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The Concept of ERM Definition: ERM is the discipline by which an

organization in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purpose of increasing the organization’s short and long-

term value to its stakeholders. The discipline: the orderly conduct of an organization Any industry: ERM applies to all industries Exploiting risk: value creating and risk mitigating Stakeholders: ERM considers all stakeholders of the enterprise

Overview of Enterprise Risk Management, CAS 3

The Concept of ERM The driving forces of the ERM evolution

There is a greater recognition of the variety, the increasing number of risks facing organizations.

Regulators, rating agencies, stock exchanges, and institutional investors have come to insist that company top management take greater responsibility for managing risk on an enterprise-wide scale.

The increasing tendency toward an integrated or holistic view of risk (portfolio risk) : individual risk elements + their interactions.

The growing tendency to quantify risks. Advance in technology and expertise have made quantification of risks easier.

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The Concept of ERM The process of ERM

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Reporting & Disclosure

Source: P. ChandraShekhar & S.R. Warrier, An Approach to ERM in the Insurance Industry.

The Concept of ERM The keys to driving ERM successfully throughout

an organization Changing risk management culture Leadership support (Top-down supporting plans)

Establish goals, milestones and plans (education plan, communication plan & action plan)

Risk exposure understood throughout the organization

Well-managed corporate internal communication Good decision support and statistical analysis tools

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IAIS ERM Guidance IAIS adopted “Guidance paper on enterprise risk

management for capital adequacy and solvency purposes” in October 2007 IAIS recognizes that the use of good risk management practices is

important for insurers in their effective management of the insurance business.

This Paper provides guidance on the establishment and ongoing operation of an ERM framework, and its importance from a supervisory perspective in underpinning robust solvency assessment.

By encouraging insurers to meet these ERM requirements, supervisors will help to maintain the effectiveness of the solvency regime.

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IAIS ERM Guidance ERM is an acknowledged practice and is now becoming an

established discipline and assuming a much greater role in many insurers’ daily operation.

Appropriate risk management policies should be set by each insurer according to the nature, scale and complexity of its business.

This Guidance focuses on the link between risk management and the management of capital adequacy and solvency. It will assist an insurer to have appropriate risk and capital management.

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The IAIS ERM Framework

9Source: Guidance paper on enterprise risk management for capital and solvency purposes

The Guidance identifies 8 key

features of an ERM

framework. It should assist an

insurer to have appropriate

risk and capital management

policies, practices and

structures in place which are

applied consistently across its

organization, and embedded

within its processes.

Risk-Based Supervision in Taiwan

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Asset According to the Insurance Act, we precisely lay down scope

and limitations of insurance companies’ financing and investment.

A company should take its liabilities and risks into account while manage its assets and should analyze the relations between assets and liabilities to ensure its solvency.

For the purpose of hedging or enhancing profit, the demand for derivatives is getting increasing for the companies. Therefore, we have intensified the supervision of derivative instruments.

Risk-Based Supervision in Taiwan

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Liability

Formula-BasedReserving

Minimum Requirement Reserve Adequacy

2003Formula-Based Reserving

+Appointed Actuary System

Risk-Based Supervision in Taiwan

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Liability Appointed Actuary System was implemented since

2003. Appointed actuary needs to submit actuarial reports to Insurance Bureau annually.

Actuarial reports cover 5 areas: Gross premium adequacy test Reserve adequacy test The appropriateness of policyholders' dividends ALM analysis Assessment of solvency

Risk-Based Supervision in Taiwan

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Capital

Required solvency margin based on

paid-in capitalRBC

RBC300% 300%>RBC200% RBC<200%

2003

2008semi-annuallyreport & disclose

Risk-Based Supervision in Taiwan

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Taiwan Insurance Institute compiles and posts the statistics referring to financial, business status of all insurance companies and the important indices of the industry on the website periodically (www.tii.org.tw).

Public Disclosure Since 2001, we required the insurance companies to

disclose their financial, business information, and material information regarding the consumers’ interests on their website and in written form to the public regularly.

Risk-Based Supervision in Taiwan

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Corporate Governance From 2001, we required the insurance industry to

build up an internal control and auditing system as follows : Internal control system: include Internal auditing system;

Legal compliance system; Self-inspection system; External auditing system, and Risk control system.

Internal auditing system: constitute an independent Auditing Department and the Chief Auditor.

Risk-Based Supervision in Taiwan

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Corporate Governance To cope with the complexity of market, we required

companies comply with the Corporate Governance Best-Practice Principles for Insurance Companies in 2003 as follows: protect shareholders' rights and interests strengthen the responsibilities of the board of directors fulfill the function of supervisors respect policyholders’ and stakeholders' rights and interests maintain solvency enhance information transparency

Risk-Based Supervision in Taiwan Risk Transferring

Guiding insurers to establish the risk management mechanism, and pay attention to the aspects of their reinsurance management as follows:

Risk management of retention: risk bearing capability, maximum risk accumulation limits.

Risk management of ceding reinsurance: types of reinsurance, selection of reinsurers and brokers.

Risk management of inward reinsurance: lines of business, domiciles, exposures, accumulation limits.

Risk management of reinsurance within the conglomerate: The affiliate reinsurance transactions and procedure within the conglomerate. 17

Future Perspective To draw up ERM Principles for the insurance industry of

Taiwan Encourage insurance industry to develop its own integrated RM

framework based on the company’s business lines, scale and complexity.

Design the self-assessment form to help the insurers to evaluate their risk management system.

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Future Perspective Risk Management Self-assessment Form

The structures of the RM system The functions and responsibilities of the board, CRO, RM department, and

other related business units. The policies and strategies of the RM system

Constituting the policies and strategies of the RM system. Disclosing and documenting the information of the RM.

The procedure and implementation of the RM system Identifying and quantifying the risks faced by the companies. Measuring the interaction of the risks and risk appetite of the company.

The monitoring system of the RM system Establishing the monitoring system to manage and oversee the effectiveness

of the RM system.

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Future Perspective

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Current Status (Regulatory System)

ERM (Self-Regulatory)

Solvency II (Regulatory System)

Asset Management

Reserve Adequacy

Capital Adequacy

Corporate Governance

Public Disclosure

I. Quantitative Risk Management Risk Measurement Risk Limit Capital Adequacy II. Risk Governance Risk Responsibility RM Strategy Operation control

and auditing III. Public Disclosure Risk Disclosure Financial Disclosure

I. Quantitative Requirement Quantification

insurance reserve Investment rules Capital requirements II. Supervisory Review Process Internal control Intervention power III. Transparency Disclosure Reporting

requirement

Rule-based Supervision

Principle-based Supervision