Risk management essential for insurance firms - Aviva Director

Hiran H. Senewiratne

RISK MANAGEMENT: Sri Lankan insurance companies should have a proper risk management system, which is important in the event of a natural catastrophe, Economic Capital Director Actuarial Aviva Plc, Jim Webber said.

"Studies have shown why insurers fail, down simply to mismanagement of financial decision-making," Webber said at a presentation on Risk Based Capital.

He said the main purpose of the supervision of insurance is to ensure that insurers have the capacity to meet their obligations to pay the present and future claims of policyholders. It is also of great value to make information on the financial soundness of insurers known to the insurance market.

Webber said Malaysia and Singapore have recently-introduced formula based of Risk Management Capital systems that avoid the complexities of large computer models.

These models should be taken into consideration by Sri Lankan insurers when designing models, he said.

Capital requirements for Sri Lankan insurers are determined on a basis that has some similarities with solvency. The system has worked well for a number of years, but given global developments there are strong reasons for thinking seriously about moving towards a full risk based system that can reflect the complexity of today's insurance and investment markets, he said.

The Sri Lankan Regulator must increase the minimum level of capital fourfold from Rs 250 million to Rs 1,000 million per line of business, he said.

The minimum capital requirements for European insurers is less than half this figure (around Rs 450 million), and some people may be questioning if the proposed increases are excessive for a developing country.

Webber said identifying risks and quantifying the capital required to support these risks could soon become very complex. Some companies have invested millions of Euros in complex computer systems that can model the risk profile of the insurer through thousands of different simulations allowing for different types of risk such as natural catastrophes in reinsure failure and interest rate changes as well as the possible interdependencies between these risks, Webber said.

Companies building on this type of model will require teams of actuaries, computer professionals, statisticians and economists to produce credible workable models, he said.

Meanwhile the amendments to the Regulation of Insurance Industry Act were passed by Parliament, which are expected to bring changes to the industry.