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.

Agenda  The Concept of ERM  IAIS ERM Guidance  Risk-Based Supervision in Taiwan  Future Perspective 2

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 organization’s 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 3

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. 4

The Concept of ERM  The process of ERM 5 Reporting & Disclosure Source: P. ChandraShekhar & S.R. Warrier, An Approach to ERM in the Insurance Industry.

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 6

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. 7

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. 8

The IAIS ERM Framework 9 Source: Guidance paper on enterprise risk management for capital and solvency purposes 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.

Risk-Based Supervision in Taiwan 10  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.

Risk-Based Supervision in Taiwan 11  Liability Formula-Based Reserving Minimum Requirement Reserve Adequacy 2003 Formula-Based Reserving + Appointed Actuary System

Risk-Based Supervision in Taiwan 12  Liability  Appointed Actuary System was implemented since 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

Risk-Based Supervision in Taiwan 13  Capital Required solvency margin based on paid-in capital RBC RBC  300% 300%>RBC  200% RBC<200% semi-annually report & disclose

Risk-Based Supervision in Taiwan 14  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 (  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.

Risk-Based Supervision in Taiwan 15  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.

Risk-Based Supervision in Taiwan 16  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

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. 17

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 company’s business lines, scale and complexity.  Design the self-assessment form to help the insurers to evaluate their risk management system. 18

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. 19

Future Perspective 20