A Change of Paradigm for the Insurance Industry Abstract In this paper we review changes in the insurance industry due to new risk-based regulations such as Solvency 2 and SST. The move from corporate management based on cash-flow to risk-based management is described and discussed through its consequences on capital management, economic valuation and the internal model. We discuss the limits and difficulties of Enterprise Risk Management and its effect on the organisation of companies and the role of actuaries in insurance. The risk/return relationship is becoming a central element of the company’s management, slowly supplanting the traditional accounting view. By Michel Dacorogna Scientific Advisor, SCOR Texts appearing in SCOR Papers are the responsibility of their authors alone. In publishing such articles, SCOR takes no position on the opinions expressed by the authors in their texts and disclaims all responsibility for any opinions, incorrect information or legal errors found therein. November 2015 N°34
SCOR paper n°34 - A Change of Paradigm for the Insurance Industry 1. Introduction European insurance companies today are in the throes of preparing to implement the new Solvency 2 prudential rules, while Swiss insurers and reinsurers have been applying the Swiss Solvency Test (SST) for several years now. Both regulations are intended to be risk-based. However, discussions on the subject mainly concern the pertinence of the different measures proposed or the cost of upgrading the companies to fit Solvency II requirements. Contrary to the heated debates during the drawing up of risk-based solvency regulations, scant attention is paid today to the profound changes represented by these regulations in terms of corporate management. The insurance industry has a long history and its contribution to the expansion of the European economies in the 19 th and 20 th century is significant. Today, it is essential to the healthy development of the economy. For many years, corporate management was limited to the management of cash-flow. As long as the premiums received and the financial returns exceeded the payment of claims and overheads, the company was considered to be profitable and thus solvent. The performance indicators derived from this approach were, and still are, the combined ratio (claims plus costs in the numerator, divided by the premiums in the denominator) in property insurance, and the technical margin (the ratio of gross revenue to premiums and financial returns) in life insurance. Even today, these performance measures are paramount in corporate communications and media coverage. However, financial market pressure, banking regulations and the new risk-based insurance regulations, are leading to the gradual introduction of other performance measures such as return on risk-adjusted capital (RoRAC) and return on equity (ROE), all of which are related to the concept of the risk underwritten by insurers. This means not only knowing the positive cash-flow position,
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- Actuarial Science, insurance industry