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

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

• Dr. Huang, Tien-Mu
• Director General, Insurance Bureau
• Financial Supervisory Commission, R.O.C.

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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
  organizations 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

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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

Reporting Disclosure
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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
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.
Source Guidance paper on enterprise risk
management for capital and solvency purposes
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Risk-Based Supervision in Taiwan

• 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.

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Risk-Based Supervision in Taiwan

• Liability

Minimum Requirement
Reserve Adequacy
Formula-Based Reserving
Formula-Based Reserving Appointed Actuary System
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Risk-Based Supervision in Taiwan

• 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

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Risk-Based Supervision in Taiwan

• Capital

Required solvency margin based on paid-in capital
RBC
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Risk-Based Supervision in Taiwan

• 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.

• 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).

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Risk-Based Supervision in Taiwan

• 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.

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Risk-Based Supervision in Taiwan

• 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

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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.

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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 companys
  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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