RISK MANAGEMENT FOR INSURERS IN ISRAEL A Regulatory Perspective

Perspective of the Insurance Commission What we are encouraging New Regulation – description and intent

Background Life and non-life: composite companies Pension: risks borne by plan members Risks increasing or changing

Policyholder Liabilities Traditional Balance Sheet: one outcome Risk Management: universe of outcomes Probability and severity of each outcome Assets Asset-Liability Management

Before 2005 No appointed actuary system No required risk management function

2005 Legislation Chief Risk Officer for each: Insurance company Pension plan management company Pension plan

2005 Legislation Chief Risk Officer: –Person not “function” –No administrative responsibility –Advisory responsibility

2006 Circular Responsibilities: chief risk officer Support: actuaries, investment and reinsurance officers Risks: underwriting, market price, credit Stepping stone: enterprise risk management

Chief Risk Officer – Responsibilities Identify significant risks Evaluate monitoring and controls Evaluate preparedness for extreme events Quantify risk exposure Estimate economic capital

Economic Capital December Correlations not required but encouraged Better understanding of risks Role in determining regulatory capital

Economic Capital Capital relief: –Company data and research –Effective monitoring and controls

Economic Capital Guidance: –A Global Framework for Insurer Solvency Assessment (IAA) –Quantitative Impact Study 2 – Technical Specifications (CEIOPS)

Chief Risk Officer – Responsibilities Immediate Reports: –Inadequate monitoring and controls –Hazardous situation requiring correction Annual (Quarterly) reports Separately: risks for policyholders

Chief Risk Officer – Support Right to receive any information Annual (quarterly) reports: –Appointed actuaries –Chief investment officer –Reinsurance officers

Chief Risk Officer – Support Internal auditor –Independence –Work plan to include risk monitoring and controls

2006 Circular – Implementation Deadlines in stages over three years Implementation plan for each company

Encouraging Effective Risk Management Circular: no reporting to Commissioner Chief Risk Officer: –under CEO or senior manager –CEO and investment officers not eligible

Encouraging Effective Risk Management Risk management culture Prerequisite for capital relief Executive compensation

Encouraging Effective Risk Management Capital relief –New regime linked to Solvency 2 Executive compensation –Draft regulations: Boards of Directors

Effective Risk Management – Board of Directors High-level policy: –Exposure of company and policyholders to risk –Reinsurance –Data security

Effective Risk Management – Board of Directors Approve risk controls Set exposure limits: –individual risk categories –all risk categories combined Examine capital adequacy

Regulatory Emphasis: Strengthen Internal Risk Controls