This article was published in "Pravartak" magazine published from National Insurance Academy (NIA) Pune in 2016 February.

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2. Pravartak December 15 - February 16 Volume X Issue 4
Importance of Enterprise Risk Management in Life
Insurance Sector
This Paper describes the landscape of Enterprise Risk
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framework is applicable in the developed market and where
the Indian Insurance Market is currently placed in this regard.
The paper further describes the future of ERM in India and what
could be the success factors in its implementation.
Why Risk Management is required
Risk is present everywhere in all walks of life; this is particularly
more true in the life insurance business which deals in the
management of risk of its policyholder against his/her early
death, living longer than anticipated( longevity risk) or
movement of interest rates adversely than required to be meet
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managing the risks of policyholders, life companies themselves
expose to these risks. These risks are priced in a form of a
premium; however the adverse variability of actual experience
of parameters such as mortality, lapses, interest rates etc used
in the pricing could leads adverse risk for insurance companies.
It is therefore important to manage these risks so that the
losses due these adverse movements can be minimized. In
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x Better risk transfer
x Understanding of linkage between business growth risk
and return.
x Better allocation of capital
x Improve valuation of the company
x Reduce earnings volatility
x Increase shareholder value addition etc.
x Why Risk Management Now
2008 economic crisis accelerated the pace of development of risk
management (ERM) in a similar way the “Great Depression” in
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of the book “General Theory of Employment, Interest and
Money” by John Maynard Keynes. The idea by Keynes was to
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Vice President (Business Risk) at Aviva
India Life Insurance Company Limited.
He can be reached at
sonjai_kumar@hotmail.com
Leaving aside the colloquialism
of the corporate world, the
notion of a VUCA world does well
describetherealitiesofoperating
and building businesses in
today’s challenging world.
It is no longer enough to
take a silo approach to risk
management focusing only on
a couple of key risk factors or
simply local factors.
Sonjai Kumar *
Disclaimer: Views expressed in this
article are mine and not necessarily of
my employer

5. 10 Pravartak December 15 - February 16 Volume X Issue 4
x Overall control failure
x Failure of the Board Room
x Too innovative products
x Easy available credit
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Though the 2008 Economic crisis has led to
hastening of use of risk management tools,
the work on risk based capital where good risk
management helps in improving the capital
position of the Company started some eight
to ten years before the economic crisis. This
indicates that world had started moving towards
reward of risk management much before the
economic crisis.
The post crisis 2008, many papers were written
on the possibility of future recurrence of such
crisis, however, it has been concluded that no
risk management can totally prevent another
crisis but it can prepare
the world better to reduce
its adverse impact or delay
the crystallization of risk in
a similar way no economic
theory can lead to insulation.
What is ERM?
Risk management is in
existence in insurance sector
for 100s of years. Life insurance companies are
managing mortality, longevity, interest rate,
expense and lapse risk for many of years,
however the risk management tools utilized
used to be in silo, that is, risk management was
limited to few people or few departments.
On the contrary, ERM is an integration of risk
strategy and risk management across the
company. The Board at the top of the ladder
is owners of risk policies implemented by
CRO. Risk objective are fully built into every
function head and they are evaluated on those
risk objective apart from other objective of
the company. This way it is ensured that risk
objective and risk culture moves down to the
DNA of the organization to fully integrate risk
management across the Organization.
Instead of defensive control oriented approach
of downside risk and earning volatility under
silo approach, the idea of ERM is to optimize
business performance by optimal allocation of
resource through risk based decision making
to make risk management as an offensive
tool. The biggest advantage of ERM is to give
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correlation of risks to encourage various risks
taking ability.
Transition into ERM
The transition of the world is towards ERM where
CRO is becoming an important position in the
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in the implementation of the Risk Management
frame work. In 2015 in UK, “CRO insurance
survey” was conducted by Ernst and Young has
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1. The standing of CRO’s is consistently
increasing across market, however
views on CRO role and its
evaluation is differ.
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formalized their systems of
governance around three
“lines of defence” but no
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Regulatory intrusiveness
and uncertainty has been
and will continue to be a “distraction”
to the CRO role.
4. 76% of CRO state that Own Risk
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6. adds value to their organization but
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remains a challenge.
5. People and skill set remain key priorities
for investment.
The capital determination in banking sector is
done based on risk based capital under Basel-
II/III norm in a similar way in insurance sector
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implemented where capital determination is
based on risk based capital.
Instead of defensive control oriented
approachofdownsideriskandearning
volatility under silo approach, the
idea of ERM is to optimize business
performance by optimal allocation of
resource through risk based decision
making to make risk management
as an offensive tool.
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Pravartak

7. 11Pravartak December 15 - February 16 Volume X Issue 4
Risk Based Capital
The historic method of capital determination for
solvency purpose in insurance companies were
based on solvency-I method using formula (x%
of Reserves+ y% of sum at risk, where x and
y different for different product line). In this
approach two different companies with similar
products, strategy, management, business
volume would have similar capital requirement
even if one company is with very good risk
management while other with not so good risk
management. This is because the formula does
not allow use of good risk management in the
calculation of solvency capital, though there
could be some second order effect due to good
experience resulting from risk management
efforts.
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on capital saving due to good risk management.
Ideally, poorly risk managed companies
should have more risk, more chances of losses
and therefore should have higher capital
requirement to meet extra loses. Therefore, in
risk based capital, capital is calculated based on
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risk managed company will have lower capital
requirement as compare to poorly risk managed
company. Therefore solvency-II provides
incentive to invest in risk management.
Risk based capital is calculated using value at
risk (VaR) methodology.
This is a statistical tool
where VaR is calculated
as maximum loss to the
company in a given time
frame and within certain
level of probability. This
time frame could be one day
or one year or any other period as desired and
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level required for the purpose.
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Market risk, Credit Risk, Equities risk,
Operational risk
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Pillar-1 and Pillar-II interacts, while Pillar-III
interacts with both Pillar-1 and Pilllar-2
This is the position of solvency II applicable in
European countries;
On the other hand India is working on solvency
I regime where capital is calculated based
on formula approach. To initiate the risk
management culture in the Indian insurance,
regulator (IRDA) has made CRO position
mandatory in every life insurance company.
76% of CRO state that Own Risk
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8. adds value to their organization
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embedding remains a challenge.
Pillar-I
Quantita-
tive part
of capital
calculation
Pillar -II
Risk Man-
agement
Pillar -III
disclousers
Also the IRDA made it mandatory to have
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on its website. IRDA also asks to calculate life
companies risk based capital on an annual basis
for reporting purpose only. Life companies also
submit their assets and liability position on
quarterly basis.
All the insurance companies
must have Assets and
Liabilities Committee
and Risk Management
Committee as a part of
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companies in the Indian
market are following risk
management processes prevalent in foreign
partner country.
Future of Risk Management in India.
The future of risk management in India is
likely to increase in future due to increase in
oversight required by foreign player meeting
the requirement under solvency-II. The
Indian regulator may also increase focus on
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Pravartak

9. 12 Pravartak December 15 - February 16 Volume X Issue 4
risk management to increase oversight. The
opportunities in the risk management area is
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there in liquidity risk, credit risk, interest rate
risk, operational risk etc.
Success factor
On the individual front, the key success factor
for risk management is the understanding of
the risk management tools and good knowledge
of business and its products along with good
communication skills. Risk management is a
partnership game and not a police man role.
Therefore attitude inter personal skills are
equally important in the overall success of risk
management success.
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Pravartak
”
“Risk management is a partnership
game and not a police man role.