As we progress into 2016, the focus has shifted in ORSA requirements and reporting with the large tasks of providing continual assessments of organizational capabilities, and successfully overcoming the wide variability in ORSA & ERM frameworks. Effective risk management and accurate risk reporting is crucial for a successful risk governance scaffold.
Henry K. Fu, Director of Enterprise Risk Management at Fidelity and Guaranty Life, recently spoke with marcus evans regarding topics to be discussed at the upcoming 3rd Annual ORSA & ERM meeting:
What is the global view of insurers risk, capital adequacy, and dependency between risk and capital?
HF: Capital solvency is the primary risk concern for insurers and the regulators who regulate them. The Own Risk Solvency Assessment (ORSA) regulatory requirement within the US and internationally requires insurers to assess and report on capital adequacy from a risk perspective. As a life company, our products have long time horizons and we have always taken a long-term view on risk and capital.
For some other insurer types (health, PNC, combinations) with shorter time horizons, this may be a relatively new perspective.
What approach do you take in risk reporting to help quantify operational risk?
HF: Operational risk can be quantified through the development of expert scenarios and risk metrics. Metrics should be developed in collaboration with experts who are front line business owners who understand the risks they face and the appropriate metrics to apply. Within our company, we work with our business units to develop risk metrics that are aligned with our corporate risk appetite.
What are some suggestions for quantifying unknown risk factors in risk assessment?
HF: Risk factors (RF) can always be quantified by assessing the likelihood of occurrence and the magnitude of impact. To identify unknown factors, an approach could be to consider the universe of relevant risks that can have a significant impact and then identify the root causes (factors) for the risks. Focus quantification on those risk factors that have the most direct impact. This approach may possibly help to identify previously unknown risk factors. For risk assessment purposes, consider both qualitative and quantitative risks.
What are the best ways to integrate model validation into enterprise-wide processes?
HF: Models should be tested and compared with real-world and base-line scenarios to determine if the results are consistent. Assumptions should be calibrated to achieve appropriate severity. There should be built-in processes for review and approval of models as well as independent challenges and debate for validation purposes. Model validation should be formalized with documented policies and procedures as well as undergo regular testing by independent parties to ensure effectiveness and consistency with accepted approaches.
What is the overall importance of understanding how to effectively quantify operational risk exposures in risk management?
HF: Operational Risk (OR) has not received the level attention that the mathematically modeled risks have had in the past. However, OR has been critical in the failure of several large financial institutions and is now receiving more attention from regulators and the insurance industry. Having rigor around quantifying OR exposures allows an insurer to understand, measure, and prioritize its risk mitigation activities. Without such understanding, companies may find themselves exposed to greater risk than their models predict.
Mr. Fu is the Director of Enterprise Risk Management (ERM) and the co-chair of the ERM and the Cybersecurity committees at Fidelity & Guaranty Life, a public NYSE listed life insurer based in Des Moines, Iowa with $18 Billion in assets under management. He has over 15 years within the financial services industry to include insurance, banking, and audit organizations and has held a variety of roles in risk management. Specialty areas include Own Risk Solvency Assessments (ORSA), Economic Capital (EC) solvency modeling, Stress Testing, Sarbanes Oxley (SOX) compliance, and Information Security.
Mr. Fu received his MBA in business administration and accounting from Rutgers University and is an undergraduate of SUNY Buffalo with a BS degree in economics and finance.
Join Henry K. Fu and many other industry professionals at this year’s 3rd Annual ORSA & ERM Conference. View the conference agenda to check out the key speakers and topics to be addressed.