Optimizing the Risk Monitoring Function; Turning the Risk around

1. Optimizing the Risk Monitoring
Function; Turning the Risk
around
ERM Leadership Summit, Jan 19-20, 2017
SONJAI KUMAR,
Vice President- Business Risk
Aviva India Life Insurance
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Disclaimer: Views expressed in this presentation are mine and not necessarily of my employer

2. Agenda
1. Risk Management Process
2. Risk Monitoring
3. Early warning signals
4. Emerging risks
5. Strategic risks
6. Integration
7. Success factors
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3. Risk Management Process
1. The risk management is an iterative process- IMMMR
2. The purpose of iteration, is to take an input from the
previous process, do processing in the current process and
feed to the next process
3. Any improper processing in the current process will have an
adverse impact on the overall cycle and resulting weak risk
management
4. “Monitoring” is one of the important stages, connecting
current and next cycles of risk management process
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4. Risk Monitoring-1
1. First: Risk monitoring plays a very pivotal role in assessing whether the actions (
Accept, Avoid, Transfer, Mitigate/control) taken in the previous step of “Managing
Risk” is resulting into reducing the residual risk or not
2. Because of either change in risk or change in external/internal environment, the
management action identified in the previous step could be inadequate to reduce
the residual risk.
3. For example, Brexit which is an external environment, many of the companies in
India operating in EU have offices in England have to change their management
action as operating conditions in EU changed after the Brexit election must revise
their assumption to do business in England
4. If Companies had anticipated Brexit risk, prepared themselves for relocation of their
offices to England they could have managed the residual risk much better.
5. In this particular case, the emerging risks were not properly identified.
6. Why?
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5. Risk Monitoring-2
1. What is the issue: Many of the emerging risks particularly in the operational risks
areas are missed out due to use of „Personal Gut‟, incorrect information and
lack of Scenario and Stress testing ( SST) failing to give monetary value impact.
2. Second: Risk monitoring plays a very important role in revising the assumption
based on current experience
3. For example, while monitoring the mortality risk ( actual deaths versus expected
deaths)
4. If suppose, a pricing actuary had assumed 10 deaths in a product out of every sale
of 1000 lives and actual experience comes out to be consistently between 4 to 6
deaths out of 1000 lives over number of years
5. The improvement in claims experience could be due to improved medical
underwriting and claim management which is a good risk management practice
6. The pricing actuary will improve his mortality assumption to say 5 deaths out of
1000 lives in his similar new product. Cheaper Insurance.
7. In the operational risks, risk register are updated as a result of risk monitoring
8. Risk monitoring helps in identifying early warning signals
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6. Early Warning Signals
1. Third: Risk monitoring provide early signals for change in the risk
2. For example, while monitoring the Lapse risk ( how many policyholder’s will not
pay premium), the current and emerging economic environment will give the
early warning signal whether the lapse rate will increase or decrease
3. In the recent light of demonetization, insurance Companies will expect, lower
premium collection, revising products in light of lower interest rates
4. In the stressed economic or there is an international crisis, the inflation may
increase in India , may increase Company’s expenses- Expense risk
5. Similarly, outspread in pandemics, will tighten underwriting
6. So, monitoring of risks helps in identifying emerging risks.
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7. Emerging risk
1. Fourth: Monitoring stage helps in scanning emerging risks to assess the impact on
the business and customer orientation
2. Some of the current national and international emerging risk are
I. Demonetization
II. GST
III. Economic environment
IV. Sustained low interest rate
V. Changing Political world order
VI. Technological disruptions
VII. Terrorist attack
VIII. Extreme Weather
3. Changing political world order, may severely impact the IT industries in India
and resulting purchasing power
4. GST may re-define the distribution of products across the country
5. Extreme weather may impact the non-life industries from increasing number of
claims from natural disaster
6. Risk monitoring helps in assessing impact of existing and Emerging risks on the
strategy of the Company
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8. Strategic risk-1
1. Fifth: Risk monitoring plays very important role in managing the
strategic risk
2. Strategy is defined as achieving sustainable competitive advantage
in the presence of customers and competitors through cost leadership
and product differentiation which is difficult to copy.
3. The strategic risk is long term strategy is not achieved due to
change in the current risk or due to the emergence of new risks.
4. Some of the factors affecting long term strategies are internal and
external environment
5. The external environment could be Macro economic environment ,
general environment, industry and competitive landscape
6. The internal environment could be Organization policies, culture,
leadership, political dynamics etc.
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IMMMR

9. Strategic risk-2
1. It is important to constantly realign the strategic targets or risk mitigation plan in the
light of current changing risks or emerging risks
2. For example, Nokia did not realize the threat from the new competitive
environment from the smart phone technology some 8-10 years back and did not
change the strategy- We all know what happened to Nokia.
3. The current generation of sales must move towards digital technology to keep
up to the pace of emerging future, else many existing players may go in a Nokia
way- Need to realign the strategy in view of changing internal/external
dynamics.
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1 2 3 54
Years
IMMMR
IMMMR
IMMMR
IMMMR
IMMMR

10. Integration
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IMMMR
Risk Monitoring
Feedback from 1st
Line of Defence
Early Warning
Signals
Emerging Risk
Strategic Risk
Looping back to
New Cycle
Audit
Compliance
Improved
KPI/Optimization
Control Gaps/New
issues
Regulatory
guidelines

11. Factors for effective risk
monitoring
1. Frequency of Monitoring-
Monthly/Quarterly/Other
2. Inadequate information about
emerging risks
3. Specialist involvement in the risk
monitoring
4. Seriousness of reporting as a next step
5. Updating assumption and realign
strategies
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IMMMR

12. Overall Objective
1. The purpose of risk management is a
value addition by achieving the business
objectives staying within risk appetite (
Economic Capital).
2. Compare Actual risk position against the risk
appetite as a measure to see final impact
3. The entire risk management process can be
tweaked if there is a burst in the risk appetite
in achieving overall objectives
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IMMMR

13. Questions
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