This paper describes the use of a stochastic model of the full regulatory balance sheet of an insurer under the Solvency II regime. The purpose of the model is to enable firms to understand the key risks that threaten the regulatory solvency of the firm and therefore its long-term business objectives.

The Working Party has produced this report in order to prompt readers to engage at an early stage in InsurTech projects, through considering (i) the full range of risks associated with InsurTech developments, (ii) the lifecycle of an InsurTech venture and how any risk considerations may vary over this lifecycle and (iii) the extent to which InsurTech ventures align with risk strategy and risk appetite.

The report contains practical guidance for actuaries, risk professionals, insurance companies and their Boards on these considerations, and can be used to facilitate appropriate questioning, to help ensure that InsurTech-related business decisions are fully cognisant of the risk management issues and to help ensure the success of projects.

The Working Party developed this guidance having carried out an industry survey on a number of risk management topics relating to InsurTech, as well as having carried out interviews with a number of relevant senior stakeholders across the insurance industry, in order to better understand current sentiment and how risk management plays a part when considering opportunities in InsurTech. The Working Party views on the findings from these activities are summarised in the report.

The Management Board of the UK Actuarial Profession has identified enterprise risk management (ERM) as an area of growth, particularly within the financial sector. It is an area which offers opportunities for actuaries, working with other disciplines, to move out of their traditional sectors of employment, with the skill set required fitting well with an actuary's training and practical focus.

Members of the Profession also highlighted ERM as one of the two main areas where they wanted the Profession to focus their research efforts in the membership survey in 2009. Consequentially the Management Board allocated funds to support research projects in ERM in 2010–2011 and has worked with the ERM Practice Area Committee to identify the topics that they feel most suited to external research where the outputs will have a broad strategic value to the financial services sector.

Engineering risk methods and tools account for and make decisions about risk using an expected-value approach. Psychological research has shown that stakeholders and decision makers hold domain-specific risk attitudes that often vary between individuals and between enterprises. Moreover, certain companies and industries (e.g., the nuclear power industry and aerospace corporations) are very risk-averse whereas other organizations and industrial sectors (e.g., IDEO, located in the innovation and design sector) are risk tolerant and actually thrive by making risky decisions. Engineering risk methods such as failure modes and effects analysis, fault tree analysis, and others are not equipped to help stakeholders make decisions under risk-tolerant or risk-averse decision-making conditions. This article presents a novel method for translating engineering risk data from the expected-value domain into a risk appetite corrected domain using utility functions derived from the psychometric Engineering Domain-Specific Risk-Taking test results under a single-criterion decision-based design approach. The method is aspirational rather than predictive in nature through the use of a psychometric test rather than lottery methods to generate utility functions. Using this method, decisions can be made based upon risk appetite corrected risk data. We discuss development and application of the method based upon a simplified space mission design in a collaborative design-center environment. The method is shown to change risk-based decisions in certain situations where a risk-averse or risk-tolerant decision maker would likely choose differently than the expected-value approach dictates.

This paper focuses on Enterprise Risk Management (ERM) and strategic business management for health insurance companies in our world of ‘unknown unknowns’ and the emergence of unexpected risks over time. It illustrates how Chief Risk Officers (CROs) can focus on ‘risk and opportunity management’ through an ERM framework, and thereby balance risks against opportunities, whilst being resilient against ‘unknown unknowns’ and their emergence over time as ‘known unknowns’ and ‘known knowns’. The paper has been designed to meet the broad requirements of health insurers that would like to implement an ERM framework for the effective risk management of their health insurance lines of business. Risk management for health insurers in the context of Solvency II and broader European Commission regulatory requirements is also discussed. The authors discuss how insurers can develop and apply risk management to build resilience in the face of the storms and shocks that may lie ahead.

Capital and cost of capital form a bridge between the insurance firm and the financial markets. The term capital is used in various ways. In current parlance, economic capital is frequently used to mean capital calculated using a risk-based measure which is independent of the regulatory requirements. In this paper we discuss the concept of target capital, where the firm takes account of three different approaches to risk appetite: regulatory capital plus a buffer; rating agency views; and the views of shareholders, where they make commitments to customers and wish to protect franchise value. We describe how, when blending these views, the firm needs to understand the trade-offs between too high and too low amounts of capital, with reference to the double taxation burden, insurance gearing (leverage of premiums to capital ratio), and the impact of the firm's credit rating on maximising franchise value. We then discuss the main drivers of the cost of capital, which we define as the required total return on the market value of the firm, as determined by reference to the opportunity cost of alternative investments of equivalent risk. We explain that, because the stock market value of the firm is not the same as the capital held inside the firm, the cost of capital derived from external studies cannot be directly applied to internal measures of target return such as return on equity (ROE); it is necessary to translate between the two measures. We separate the risk of the firm between the investment risk and the insurance risk. We describe the frictional costs of investing in an insurance firm, and explain the role of parameter and model risk arising from the uncertainty of the future claim costs of the firm. We describe the findings of two studies of the actual historical stock market returns of United States P&C companies. One of them suggests that applying the Fama-French model produces higher and more accurate cost of capital estimates than the capital asset pricing model (CAPM) method. This is explained by linking the price to book ratio to the costs of financial distress, which are particularly important for general insurance firms, given the influence of insurance strength ratings from the rating agencies. Finally, we attempt to estimate the risk load required in premiums to compensate investors for the elements of cost of capital which we have described, in a way that combines the financial economic approaches to insurance target returns with the traditional actuarial approaches to assessing the risks in the insurance business.

The authors have reviewed over 60 texts on the subject of Enterprise Risk Management (ERM). In this paper they set out a summary of ERM based on three of those sources, selected for their relevance and breadth of view. The paper observes that the approaches described vary widely in nature. A separate ‘on-line” source is provided, which summarises key readings from the 60 texts. Combining findings from these texts with the authors' own experiences, the paper suggests some best practice checklists, designed to enable organisations to take stock of their current ERM frameworks. It discusses other aspects of ERM for practitioners, including extreme events, opportunity management and the link with corporate strategy. The paper looks at immediate and longer-term implications for actuaries in the United Kingdom, and then poses questions about future professional development and education. It suggests an emerging role for the ‘ERM actuary’, and, finally, it suggests future work to progress the development of ERM and the actuaries' role.