CRO Survey – Insurance Risk and the Influence on Business Strategy

Methodology 

Since September 2017, River Partnership have interviewed 40 CROs drawing together data, opinion and independent research in order to produce a live view on the important qualitative topics driving change within the Risk office.

The purpose of this report is to contribute to the debate regarding the influence of risk on business strategy within the (re)insurance industry. We have analysed these conversations to form insights which uncover the broad risk drivers for (re)insurance organisations and develop a deeper understanding of how risk talent can influence business strategy.

Acknowledgments

A thank you to all those who participated to the outcomes of this report and who have taken the time to meet and discuss. The quotes below are not exhaustive, however we hope they are illustrative of the breadth of conversations and go some way towards furthering future discussion and understanding.

Key Themes 

1) Cost centre to Strategic Enabler

Traditionally coined as a cost-centre, the Risk office is continually under financial constraint and it is no different in today’s market. Indeed, additional pressures facing insurers related to profitability, business model change and regulatory pressure ensure increasing cost scrutiny. Tom Wilson, Group CRO Allianz, highlights “the high impact of expense management on the market as a whole”.

With cost pressures and M&A at a high, the rationalisation of teams and departments through restructuring and the re-organisation of balance sheets has come to the fore. The risk office is becoming increasingly influential on the wider Insurance businesses. Our aim has been to discover the evolution of the risk office and the modern-day risk professional. Our respondents clearly articulated an evident trend where risk is increasing its influence. With 90% viewing risk as a “strategic enabler”, the question posed is how does the risk office continue to spread its influence across the respective organisations?

As new opportunities are sought (e.g. opportunities in developing markets), risk leaders must provide pragmatic and realistic advice to their respective board members, whilst not being a blocker to strategic initiatives. As James Illingworth of MS Amlin noted “Risk is there as an advisory conscience, a navigator of the ship if you like”. Providing guidance and structure for the future, the risk function is not only a central component of each organisation, it is key to the continued development and innovation of the insurance industry.

With large-scale cost-cutting exercises taking place, this could be seen as a reactive measure, and provide cause for concern. However, as the APAC CRO of a leading P&C insurer stated, “whilst this may seem like a backwards step, these consolidatory measures will provide us with the foundation not only to become more agile but to enable us to grow the business sustainably over the coming years”.

As these measures are agreed by the executive committees, the CRO community are compelled to ride the wave of change to ensure the effectiveness of the risk office amidst times of uncertainty and provide a reassuring voice, whilst also managing more traditional pressure as seen in figure 1. This has been made clear by the CRO of a leading Reinsurer who said that as he is spearheading the risk initiative, he has to be exceptionally absorbent given the changing nature of risk and its influence on broader business strategy.

Risk is spreading it’s influence across organisations and has to deal with the change cycle head on, helping the first line look to the future, asking the questions which will make people think about their decisions. Traditionally ‘mirroring’ the skills and capabilities of the entire value chain of the organisation was a prerequisite of the second line, however, as drivers and priorities change and risk offices are streamlined and further rationalised, how can risk continue to influence?

2) Behavioural Change

From several round-table discussions, it became obvious that risk culture is high on the agenda of the CRO, however this is nothing surprising or new.

As Neil Southworth, CRO Co-operative Insurance, maintains, best principles such as "adopting an ERM program that becomes a fully integrated part of the business” and “injecting a risk and reward mindset into day-to-day activities across functions” will help to cement positive behavioural transformation. Indeed several CRO’s reasoned that systematic, group-wide change in conduct and behaviour is a long-term, sustainable approach to embedded Risk Management. 

Whilst changes in systems and processes may have an impact, 83% agree that Risk Culture and inherent business behaviour comes from the ‘Top Down’. However, what is the most effective way of achieving this in practice? 

The risk office needs individuals who can work closely and effectively with other areas of the business, whilst having buy-in from other key influencers in the C-suite. With this support, the ‘Top Down’ influence will help a firm to embed a culture of risk awareness and accountability. As Anthony Williams (CNA Hardy) concludes: “the tone from the top of the organisation is fundamental to its success”.

This year River Partnership have noted the rising importance of senior stakeholder engagement skills alongside traits of influential people leadership. In recent leadership shortlists we have necessarily highlighted individual’s gravitas and presentation skills alongside their EQ and the effectiveness of their project and people management. 

Banished are the days where technical competence alone can elevate your career to the coveted CRO position and so we encourage professionals to continue their personal and professional investment in all areas of modern leadership development.

It has been found that the modern-day risk professional needs to have a balance between domain expertise, whether that be truly technical or otherwise, and the ability to influence the decisions made by those outside of the risk world. From our conversations it has been found that there are three main traits attributed to the ‘ideal risk manager' which show the technical, emotional intelligence and business skills needed influence and to be successful (see figure 3).

The ‘top down’ approach to risk has been seen as a more traditional method of embedding certain cultures. Whilst this may have an impact on the C-Suite and senior members within the organisation, it is thought that a three-dimensional approach is needed. Whereby empowering teams and individuals from the bottom as well as the top, in what Simon Cox of Canopius termed a “pincer movement”.  He went on to state “Without the necessary change at a lower level, Insurance leaders will find meaningful embedded improvements difficult to maintain”.

With the aim to embed a ‘risk aware culture’ across the business, it has become apparent that CROs need strong teams of advisors, something which is crucial for the continued influence in a post-Solvency II world.

“Solvency II has determined all of our lives till now” Lukas Ziewer, EMEA CRO MetLife. With years of scrutiny under this regulation and a raft of systematic changes, embedding these changes has been a high priority for most CROs. As well as this, it has become apparent that improving processes and responses will be a costly and effective use of resource. Having a clear ‘recipe’ or ‘cookbook’ for risk and regulation, as Tom Wilson of Allianz stated, can help businesses respond to regulation of the future in a more agile and impactful way.

3) Regulation – and how it relates to the business

In this wake, Insurers are looking towards opportunities in the market as the grip around human capital and financial resources begin to loosen. Strong regulatory teams remain important and can be used to create a legacy of compliance and efficient processes (e.g. the improvement of ORSA process). With more band-with, energies can be focussed elsewhere whilst keeping functions compliant. For example, how can Solvency II experts evolve their skills to assist in organisations response to IFRS17? Giambatistta Taglioni, Global Insurance Risk Lead McKinsey stated “CRO priorities are shifting from risk and regulation, to cost efficient initiatives to support the wider business”.

The question many seem to face is where these efficiencies will be found. Will innovative technologies such as Blockchain revolutionise Insurance? Or will the development of a new risk operating model help insurers innovate in the future with added risk accountability held in the first line? From a conversation with Ofir Eyal, Partner & Managing Director at Boston Consulting Group, he noted that an enhanced risk operating structure can result in    10 – 20% efficiency gains per FTE required to perform core insurance processes. Therefore, the development of new risk operating models seems to be an effective way of successfully impacting change.

Our respondents favoured operating model development over reliance on revolutionary technology. 68% also emphasized the need for strong risk professionals who are excellent communicators to hold others in the business accountable. “risk shouldn’t be a big department, risk should have good people who can communicate and influence” Peter Antal, Head of Capital & Risk – PartnerRe. This is likely due to the results of such risk operating model improvements being realised and as it is a less ‘risky’ option than certain technologies which haven’t necessarily been proven within the industry.

Understanding where risk interfaces with the business is crucial. Overwhelmingly we heard that getting this right was an integral part of the functions success. “The most important task in risk” noted Lukas Ziewer of MetLife, “is understanding that we are working with Risk takers on the front line”. Additionally, Guus Schoorlemmer of NN Group takes this idea further stating that “risk has to occasionally step out of the second line and become line ‘1.5’ to work hand in hand with the first line”. Having a flexible and pragmatic second line will bring added value to insurers. A risk function that is separated from the first is only there in a supervisory role, therefore this may result in the influence of risk accountability being reduced.

Centrally, the CRO’s aim now appears to be to empower the first line. Empowering them to take responsibility for monitoring and recording their own risk, and ensure the second line is there to set the standard and controls. The question many seem to face is where these efficiencies will be found. Will innovative technologies such as Blockchain revolutionise Insurance? Or will the development of a new risk operating model help insurers innovate in the future with added risk accountability held in the first line? From a conversation with Ofir Eyal, Partner & Managing Director at Boston Consulting Group, he noted that an enhanced risk operating structure can result in    10 – 20% efficiency gains per FTE required to perform core insurance processes. Therefore, the development of new risk operating models seems to be an effective way of successfully impacting change.

Our respondents favoured operating model development over reliance on revolutionary technology. 68% also emphasized the need for strong risk professionals who are excellent communicators to hold others in the business accountable. “risk shouldn’t be a big department, risk should have good people who can communicate and influence” Peter Antal, Head of Capital & Risk – PartnerRe. This is likely due to the results of such risk operating model improvements being realised and as it is a less ‘risky’ option than certain technologies which haven’t necessarily been proven within the industry.

Understanding where risk interfaces with the business is crucial. Overwhelmingly we heard that getting this right was an integral part of the functions success. “The most important task in risk” noted Lukas Ziewer of MetLife, “is understanding that we are working with Risk takers on the front line”. Additionally, Guus Schoorlemmer of NN Group takes this idea further stating that “risk has to occasionally step out of the second line and become line ‘1.5’ to work hand in hand with the first line”. Having a flexible and pragmatic second line will bring added value to insurers. A risk function that is separated from the first is only there in a supervisory role, therefore this may result in the influence of risk accountability being reduced.

Centrally, the CRO’s aim now appears to be to empower the first line. Empowering them to take responsibility for monitoring and recording their own risk, and ensure the second line is there to set the standard and controls.

The question many seem to face is where these efficiencies will be found. Will innovative technologies such as Blockchain revolutionise Insurance? Or will the development of a new risk operating model help insurers innovate in the future with added risk accountability held in the first line? From a conversation with Ofir Eyal, Partner & Managing Director at Boston Consulting Group, he noted that an enhanced risk operating structure can result in    10 – 20% efficiency gains per FTE required to perform core insurance processes. Therefore, the development of new risk operating models seems to be an effective way of successfully impacting change.

Our respondents favoured operating model development over reliance on revolutionary technology. 68% also emphasized the need for strong risk professionals who are excellent communicators to hold others in the business accountable. “risk shouldn’t be a big department, risk should have good people who can communicate and influence” Peter Antal, Head of Capital & Risk – PartnerRe. This is likely due to the results of such risk operating model improvements being realised and as it is a less ‘risky’ option than certain technologies which haven’t necessarily been proven within the industry.

Understanding where risk interfaces with the business is crucial. Overwhelmingly we heard that getting this right was an integral part of the functions success. “The most important task in risk” noted Lukas Ziewer of MetLife, “is understanding that we are working with Risk takers on the front line”. Additionally, Guus Schoorlemmer of NN Group takes this idea further stating that “risk has to occasionally step out of the second line and become line ‘1.5’ to work hand in hand with the first line”. Having a flexible and pragmatic second line will bring added value to insurers. A risk function that is separated from the first is only there in a supervisory role, therefore this may result in the influence of risk accountability being reduced.

Centrally, the CRO’s aim now appears to be to empower the first line. Empowering them to take responsibility for monitoring and recording their own risk, and ensure the second line is there to set the standard and controls. 

The modern risk professional not only has a strong track-record, they also need to be able to assess economic drivers and have an appreciation of the impact of risk decisions on the wider business.

It is evident that having the right people can enable an organisation to achieve its strategic goals.

For example, it was explained that certain insurers are now rewarding underwriters based on profit, rather than sales. This is a seismic shift from a traditional sales culture, focused predominantly on

short-term earnings, to a strategic orientated department.

Understanding commercial drivers around risk and regulatory requirements allows for effective compliance. Risk managers could find themselves taking their eye off the ball regarding commercial and strategic risk when they are too focused on governance and reporting. The best companies in class will be the most competitive as they are prepared, planned and more strategically aware. As Simon Gadd of Legal & General stated “a firm which manages risk well will be placed for long-term sustainable profitability”. With this planning and investment, firms will be better off in the future: a more impactful response will give them an edge over competitors.

To achieve this, employees need to understand the strategy and direction immediately. Best in class companies have better engaged employees and as such, make larger returns on investment, edging out the competition. Aon’s 2017 Risk Maturity Index sums this up well, stating “Strong risk management principles and practices, implemented with consensus across and among the organization, can contribute to higher returns, even during significant market events”.


4) Compliance and the influence of technology 

With changing consumer behaviours as well as new and innovative systems, technology has proved to be the major disruptor across the Financial Services Industry. With agile, startup firms challenging the incumbent, there is a threat to market coverage which provides the opportunity to open doors to new distribution channels. A Willis Towers Watson study found that 77% of insurers surveyed believe that web and mobile delivery channels are the digital technologies to have the biggest impact on the insurance sector. You only have to take the recent news of Amazon’s push into insurance or Vitality’s use of wearable technology to reward customers by directly impacting premiums, as illustration.

Existing organisations should look at the way in which they incorporate technology as a central function to their businesses. The question many are asking is regarding the investment versus the return and whether this ‘risk’ is one worth taking. A recent Mazar’s report into ERM in Insurance stated that “Spearheading the effective use of technology across all risk functions, and across the business at large will create a single enterprise view”.

Compliance technology was another topic to be raised in conversation, specifically as there is a shortage of experienced people and there does not seem to be a firm in the market with best practice. When it comes to best practice in risk and compliance, there needs to be significant investment to strengthen this capability. “Compliance and technology risk is where firms remain fairly weak, this is where experts are needed. Not just regarding cyber risk, it will incorporate a range of topics. The highest expense line after people is technology”. (Raj Singh, Standard Life Aberdeen). Technology could provide opportunity to build a market-leading capability and complement broader business strategy, however will require investment. In return, this may lead to attracting and retaining leading figures in the market, raising the organisation’s reputation for innovation.’

Whilst investment in new technology and best practice are pivotal, people are at the heart of the organisations, therefore an investment in technologically minded experts may be a solution. "In the battle between investment in risk people and in risk technology, it’s people that win every time" (Graham Handy, Sherpa Insurance). This maybe where the hesitation in clear and defined decisions are being made regarding the investment into technology.

Competition for technology talent is rife, with the best technology attracting the best talent. Not just within Insurance and not just Financial Services. Whilst the banking industry is putting a strain on resources with large technology initiatives, the technology giants including the likes of Alphabet, Facebook and Amazon are luring the top technology talent away from Insurance.

The table below outlines topics of concern raised regarding the (re)insurance industry.
Insurers will struggle to attract and retain talent in areas including big data, machine learning and AI as other companies may be perceived as more innovative, with better working cultures and with an attractive brand name above the door.

Culture, engagement and progression are all key aspects in a career, something which (re)insurers need to ensure they are consciously providing. If not, the talent pool will continue to decrease with valued employees jumping ship.

Conclusion

By promoting conversation amongst the CRO community, it has been found that the role of the CRO and risk officers has evolved into a fundamental part of insurance strategy. Many of the opportunities and challenges outlined in this thought piece highlight the continued effort of those, both in and out of the second-line to have a risk aware culture.

Risk is now one of the first questions asked when defining business strategy and with CROs enabling decisions, rather than blocking, their reputation and credibility will continue to grow in the face of a disrupted and somewhat uncertain market space.

One thing is for sure, the investment into people and technology is pivotal. Something which should be at the top of the agenda for the whole C-suite. With people and talent at the forefront of success, the (re)insurance industry needs to ensure strategic measures are put in place to attract and retain the best people, whilst providing an inclusive, engaging and diverse working environment. The next generation of risk officers will define the future of insurance and without the best in class, challenges for (re)insurers will only grow.

To download the whitepaper in full please click here: CRO Survey – Insurance Risk and the Influence on Business Strategy

Since September 2017, River Partnership have interviewed 40 CROs drawing together data, opinion and independent research in order to produce a live view on the important qualitative topics driving change within the Risk office.

The purpose of this report is to contribute to the debate regarding the influence of risk on business strategy within the (re)insurance industry. We have analysed these conversations to form insights which uncover the broad risk drivers for (re)insurance organisations and develop a deeper understanding of how risk talent can influence business strategy.

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