Measuring Risks With RulerThe rising adoption of formal risk appetite statements is having a dramatic effect on reinsurance buying decisions, with purchasing power increasingly moving to the center, according to the findings of a new global survey by Willis Re, the reinsurance business of Willis Towers Watson.

According to the survey – which includes responses from 241 insurance companies in 48 countries – almost two-thirds (64 percent) of insurers now have a formal risk appetite statement, with a further 17 percent planning to develop one in the near future.

Of those that have a risk appetite statement, the vast majority (87 percent) are using this to drive reinsurance decision-making, said the report titled Global Reinsurance and Risk Appetite Report 2016.

“The inescapable conclusion of our research is that a clear risk appetite statement is essential to provide macro-level guidance to underwriting, retention and cession strategies,” Willis Re said in the report.

Highlights of the report include:

  • Adoption of risk appetite statements has been greatest in Europe, Asia and Africa, with over 85 percent of respondents indicating they have or will have a statement. The implementation of Solvency II in Europe has created a noticeable shift in formalizing risk appetites, rising from 56 percent in 2013 to 71 percent in 2015.
  • While take-up rates North America and Latin America are at 51 percent and 54 percent, respectively, many respondents indicated an intention to employ a statement in the near future (15 percent for North America and 26 percent for Latin America and Caribbean). “Just as Solvency II has driven European companies to place a greater emphasis on risk management, the rolling out of Own Risk and Solvency Assessment (ORSA) requirements in the immediate future will no doubt have a similar effect on companies based in North America.”
  • Reinsurance purchasing power is moving increasingly to an insurer’s center with final decisions made by top executives (named by 86 percent of survey participants). However, they are rarely alone in the process because reinsurance decision making is now a group concern. A variety of disciplines take part in the process, including risk management, finance, underwriting and actuarial.
  • The majority of insurers (77 percent) continue to prioritize traditional earnings metrics when making reinsurance decisions. Combined ratio remains the primary key performance indicator followed by loss ratio and underwriting profit. The use of capital-based metrics, such as return on equity (RoE) or return on economic capital (RoEC) is increasing, with 23 percent of respondents selecting one of these as the most important earnings metric.
  • The larger the insurer, the more likely it is to have a risk appetite statement. Ninety percent of large companies (with gross written premiums of $5 billion-plus) have a formal statement, compared to 59 percent of medium companies (GWP $100 million-$500 million) and 60 percent of small companies (GWP less than $100 million).
  • Publicly held companies are also most likely to have a risk appetite statement (85 percent) as investors demand clarity around targets and risk tolerances. This is compared to a large proportion of privately owned (68 percent) and mutual (55 percent) companies who have a statement, with the majority planning to adopt one. The lowest uptake is with state-owned companies (43 percent).

Shift Toward Risk Quantification

“The insurance industry is well served with data regarding losses, portfolio metrics and market dynamics, but until now there has been a lack of information around risk appetite and its influence on the reinsurance decision-making process,” said John Cavanagh, Global CEO of Willis Re.

“With rising regulatory and shareholder demands, increased pressure on insurer margins and a growing desire for a strong performance measurement framework, the dramatic shift towards risk quantification and management is clear. Centralized buying is also widespread as insurers increasingly link reinsurance strategies to risk appetite in order to achieve corporate objectives and the competitive advantage,” he added.

“As an industry we’ve observed the broad shift around reinsurance purchasing in recent years with the increasing adoption of formal risk appetite statements,” noted Tony Melia, CEO of Willis Re International. “Those statements have proven essential to provide macro-level guidance to underwriting, global retention management and alignment of cession to wider strategies – linking ‘micro’ strategies to ‘macro’ targets.”

Melia explained that aiming an appropriate blend “of earnings target volatility management with capital optimization is key as insurers push towards more risk-based decision making. Interesting, ly, the reinsurance tools to achieve those capital and earning goals are not new; they do however need to be redeployed under a new light.”

More About Willis Re Risk Appetite Survey

The Willis Re Risk Appetite Survey was conducted in 2015 to give an insight into global reinsurance purchasing trends to help companies benchmark their positions concerning risk appetite and reinsurance. Willis Re launched the pilot survey for Europe in 2013, with the first a global survey conducted in 2015.

*This story previously appeared in our sister publication Insurance Journal.