Managing Intragroup

Transaction, and Insurance Risk

Q5 (Executive)
Presented By:
Iwan Dharmawan
 With over 27 years of experience in the financial industry, I am a seasoned banker and financial
risk manager. I have held various leadership roles in Treasury, Capital markets, Investment
Banking, Credit, and Risk Management, delivering results, solving problems, and working with
diverse teams.
Currently, I am an independent member of the Audit Committee at Zurich Insurance Indonesia,
where I provide oversight and guidance on the audit practices and policies of the company. I am
also an advisor to several projects focused on the financial sectors, helping global name
consultants with my knowledge and network. My mission is to leverage my expertise in
banking and insurance to support the growth and resilience of the financial industry based on
Sustainable Finance.
Working Experiences: Relevant Selected Certificate:
PT Zurich Asuransi Indonesia Tbk • LSPP Banking Risk Management
PT Bank KB Bukopin Tbk Qualification 7 (BOD)
• Rupiah Currency Payment and
PT Bank Danamon Indonesia Tbk Management System (SPPUR)
IWAN DHARMAWAN PT Bank OCBC NISP Tbk Qualification 6
PT Bank Internasional Indonesia Tbk • BNSP (LSPP) Assessor of Risk
PT Indoagri Inti Plantation (Salim Group) Management Competency
• University of Cambridge CISL,
Education :
M: +62818121880 University of Arkansas, Fayetteville – USA
Sustainable Finance Certificate
E : [email protected] • BSMR Banking Risk Management
Economics Institute, Univ of Co, Boulder - USA Level 4 / Qualification 5 (Executive)
Universitas Tarumanagara, Jakarta – Indonesia
INSEAD, Singapore
https://www.linkedin.com/in/iwan-dharmawan-75885b15
Subjects

Risk Management Overview

Risk Management Implementation
Indonesia Financial Conglomeration
Intragroup Transaction Risk
Insurance Risk
Risk Management Overview
Risk Management Overview
Risk management is the process of identifying, assessing, and controlling threats to an organization's capital
and earnings. These threats, or risks, could stem from a wide variety of sources, including financial
uncertainty, legal liabilities, strategic management errors, accidents, and natural disasters.
 A robust risk management process typically involves the following steps:
1. Risk Identification: Determining what risks exist that could affect the organization's objectives.
2. Risk Analysis: Understanding the nature of the risk and its potential to affect project goals. This includes
assessing the risk's likelihood and impact.
3. Risk Assessment and Evaluation: Comparing the estimated levels of risks against risk criteria that the
organization has already established.
4. Risk Mitigation or Manage : Working out the best way to deal with the risk, which can include avoiding,
transferring, mitigating, or accepting it.
5. Risk Monitoring and Review: Continuously monitoring and reviewing the risk environment to detect any
changes in the context of the organization's risk profile.
Effective risk management can help organizations understand the risks they face, implement appropriate
measures to manage those risks, and ultimately provide a level of assurance that they are aware of and
prepared to address various types of risks.
Risk Management Implementation

Risk Management Implementation

POJK No.16/POJK.03/2016

1) Active Supervision 2) Adequacy of Risk 3) Adequacy of Risk 4) Internal Control

from BOC & BOD Management Policies Management System
& Risk Limit Implementation
Basel II / III Regulations*

OJK / Bl Regulations
Toward various types of Risk, namely: Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Strategic Risk,
Compliance Risk, Reputation Risk, and Legal Risk

Additional Risk for Sharia Bank or Business Unit: Additional Risk for Financial Conglomerates:
Investment Risk and Rate of Return Risk Intra-Group Transaction Risk and Insurance Risk

The effectiveness of the risk management implementation is also subject to the Bank’s Risk Culture.
Risk culture can be defined as the financial institution’s norms and the collective attitudes and behaviors of its people that
influence risks and impact outcomes, which provides a specific lens allowing general concerns about culture to focus on risk-
taking and risk control activities.

Ouput: Risk Based Bank Rating (Bank Soundness) & Risk Profile Rating

*Some Basel II / III regulations that have been effective in Indonesia are RWA Calculation – Standard
Method, ICAAP, LCR, NSFR, Leverage Ratio, IRRBB, etc
6
Risk Types

Credit Risk: risk due to failure of other party in fulfilling Legal Risk: risk arising from lawsuits and / or legal
obligation to Bank, including Credit concentration risk, weaknesses.
counterparty credit risk, and settlement risk.
Reputation Risk: risk due to decreased level of
Market Risk: risk in balance sheet and administrative
confidence of stakeholders from negative
account include derivative transactions resulting from
overall changes in market conditions. perceptions of the Bank.
Strategic Risk: risk resulting from the Bank's inaccuracy
Liquidity Risk: risk resulting from the inability of the Bank to in making decisions and / or implementing strategic
meet the matured liabilities of sources of cash flow decisions and failures in anticipating changes in the
financing, and / or of high quality liquid assets that can business environment.
be mortgaged.
Operational Risk: risks due to inadequate internal Compliance Risk: risks arising from the Bank's failure to
processes, human error, system failure, and / or any comply with and / or not enforce laws and
external events affecting the operations of the Bank. regulations.
Additional risks for sharia bank or business unit (POJK No.65/POJK.03/2016)

Rate of Return Risk: risk due to changes in the yield paid Investment Risk: risk due to the share of Bank in its
by the Bank to customers due to changes in the rate customer’s losses as a result of profit and loss sharing
of return received by the Bank from the financing financing scheme

Additional risks for Financial Conglomerates (POJK No.17/POJK.03/2015)

Intra-Group Transaction Risk: risk due to the Insurance Risk: risk due to failure of the insurance
dependence of an entity either directly and/or companies to meet the obligations to policy holders
indirectly to other entities in a Financial as a result of the inadequacy of the risk selection
Conglomerates to fulfill a contractual obligation process (underwriting), use of reinsurance, and/or
written and/or unwritten agreement followed by handling of claims.
either transfer of funds or not
7
Indonesian Financial Conglomeration
Indonesia Financial Conglomeration

Financial Conglomeration is Financial

Services Institutions (FSI) that are
incorporated in a Group because of the
Ownership, and / Or Controlling
Relationship which is consist of:
Main Entity, and
Subsidiaries; and / or
Related Companies along with its Subsidiaries
Financial Conglomeration (POJK No.17/POJK.03/2014, POJK No.18/POJK.03/2014, POJK 45/POJK.03/2020)

 Financial Conglomeration is Financial Service Institution (FSI) which lie within a group due to ownership and / or control
linkages which has total assets of IDR 100 trillion or more and the business activities in more than 1 type of FSI. However,
OJK can determine a group of FSI as a Financial Conglomeration although the group do not met the criteria of Financial
Conglomeration.
 Financial Conglomeration has structure which consists of Main Entity and subsidiary companies; and / or sister
companies and their subsidiaries.
 The types of Financial Institution within the Financial Conglomeration are as follows:
a) banks; c) securities companies; and / or
b) insurance and reinsurance companies d) financing companies.
 Based on POJK No. 45/2020, the Main Entity of the Financial Conglomeration is required to prepare and have a
corporate charter signed by the BOD of the main entity and BOD of entity members of the Financial Conglomeration.
The Corporate Charter should be submitted to OJK at the latest 31 Dec 2020 for the first time.
Integrated Risk Management (POJK No.17/POJK.03/2014)

 Financial Conglomeration is required to implement an integrated risk management comprehensively and

effectively, which covering 8 types of risk added with Intra Group Transaction Risk and Insurance Risk.
 To support the Integrated Risk Management implementation, the main entity shall establish Integrated Risk
Management Committee and Integrated Risk Management Function.
 In a half-yearly basis, the Bank should also develop the Integrated Risk Profile Report.

Integrated Corporate Governance (POJK No.18/POJK.03/2014)

 Financial Conglomeration is required to implement an integrated corporate governance which covering:
a) Requirement of BOC and BOD of the Main entity e) Duties of Integrated Internal Audit Function
b) Duties of BOC and BOD of the Main Entity f) Implementation of Integrated Risk Management
c) Duties of Integrated Corporate Governance Committee g) Development and implementation of Integrated Corporate
d) Duties of Integrated Compliance Function Governance Guideline
 To support the Integrated Risk Management implementation, the main entity shall establish Integrated Corporate
Governance Committee
 In a half-yearly basis, the Bank should also develop the Integrated Corporate Governance Report.
10
Regulations Reference
 POJK No 17/POJK.03/2014 regarding the Implementation of Integrated Risk
Management for Financial Conglomeration.
 SEOJK No 14/SEOJK.03/2015 regarding the Implementation of Integrated
Risk Management for Financial Conglomeration.
 POJK No 18/POJK.03/2014 regarding Implementation of integrated
Corporate Governance for Financial Conglomeration.
 SEOJK No 15/SEOJK.03/2015 regarding Implementation of Integrated
Corporate Governance for Financial Conglomeration.
 POJK No 26/POJK.03/2015 regarding Integrated Capital Adequacy for
Financial Conglomeration
 POJK No 45/POJK.03/2020 regarding Financial Conglomeration.
 UU No 4 / 2023 on Financial Sector Development and Strengthening (P2SK)
Law No 4 / 2023 – P2SK

FINANCIAL SECTOR IN INDONESIA

Financial Services Authority Bank Indonesia (BI) Deposit Insurance Corp. (LPS) Other: Min. of Finance, etc.
Regulator
Financial System Stability Committee (KSSK)

3. 7. 8.
1. 2. 4. 6.
INSU- COOPERA- MICRO
BANKING MARKET RANCE FINANCING PENSION TIVES FINANCE

Conventional Capital Pension funds

Insurance
Nat'l pension
Shariah Funds Mutuals program
Digital Foreign exch. Reinsurance Other programs Sector

5.
BUILLION

Potential
TECHNOLOGY INNOVATION CONGLOMERATION progression

SUSTAINABILITY LITERACY, INCLUSION, CONS. PROTECTION MSME ACCESS TO FINANCE HUMAN RESOURCES LAW ENFORCEMENT
Cross cutting
issues

Financial System Stability (SSK)

Coordination among authorities Treatment to systemic banks Treatment to non-systemic banks Objective

Source: :USAID Economic Growth Support Activity (EGSA), 2023

Criteria (POJK No 45/POJK.03/2020)
 Criteria for Group categorized as Financial
Conglomeration, that are in one Group or group due to
Ownership and / or Controlling relationship:
 Total Group Assets >= IDR 100 Trillion
 Has Business activities in more than 1 type of FSI
 Types of FSI which are included in the Financial Conglomeration are
:
 Bank
 Insurance Company or Reinsurance Company
 Financing Company (Multi Finance); and / or
 Securities Company
 Main Entity
 Main Entity of Financial Conglomeration must prepare and have a Corporate
Charter signed by Board of Directors (BOD) of the Main Entity, and BOD of the
FSI Members of the Financial Conglomeration.
 Contents and Scope of the Corporate Charter is adjusted to the characteristics
and complexity of the Financial Conglomeration’s business, and contains at
least:
 Objectives, preparation basis, and Scope
 Structure of Financial Conglomeration; and
 Roles and Responsibilities of the BOD of the main entity, and BOD of the FSI members
of the Financial Conglomeration.
 In the event that are change in the Corporate charter, the main entity is required to
submit a document amending the Corporate Charter to OJK at least 1 month after it
signed.
Intragroup Transaction Risk
 Intragroup Transaction Risk
Intragroup transaction risk in financial conglomerates refers to the
potential risks arising from transactions or activities conducted
between entities within the same financial conglomerate. These risks
are particularly relevant in a conglomerate structure where multiple
financial institutions or companies are interconnected. Managing these
risks is crucial for the stability and integrity of the conglomerate as a
whole.

Key Point : Arm’s Length Transaction

 Key Aspects of Intragroup Transaction
Risk
1. Credit Risk: Intragroup transactions can create credit risk if one entity in the conglomerate becomes financially unstable. This risk
arises when intercompany loans or credit facilities are not repaid, potentially leading to financial strain on the lending entity within
the group.
2. Liquidity Risk: Transactions between group entities can impact the liquidity management of the conglomerate. For instance, if one
entity faces a liquidity shortfall and relies excessively on other entities within the group for funding, it can strain the overall liquidity
position of the conglomerate.
3. Market Risk: Intragroup transactions involving financial instruments can expose the entities to market risk if the value of these
instruments fluctuates significantly. This is particularly relevant for transactions involving derivatives, foreign exchange, or securities
trading.
4. Transfer Pricing Risk: The pricing of intragroup transactions can lead to risks if not aligned with market rates. Inappropriate transfer
pricing can distort the financial performance of individual entities and can have tax implications.
5. Regulatory Compliance Risk: Financial conglomerates must ensure that intragroup transactions comply with regulatory
requirements, including those related to capital adequacy, related-party transactions, and exposure limits.
6. Operational Risk: This includes the risk of losses due to failures in internal processes, systems, or controls in the management of
intragroup transactions. It also encompasses risks from external events that can affect multiple entities within the conglomerate.
7. Concentration Risk: A high level of interconnectedness and concentration of exposures within a conglomerate can create systemic
risks, where the failure of one entity can have a cascading effect on others.
Managing Intragroup Transaction Risk

• Implement robust risk management frameworks that encompass intragroup

transactions.
• Establish clear policies and procedures for intragroup transactions, including
approval processes, pricing mechanisms, and limits on exposures.
• Maintain transparency in reporting intragroup transactions to ensure
adequate oversight by regulatory authorities and internal management.
• Ensure compliance with regulatory requirements related to capital adequacy,
exposure limits, and related-party transactions.
Overall, effective management of intragroup transaction risk is essential for the
financial health and regulatory compliance of financial conglomerates, as well
as for the stability of the broader financial system.
 Intragroup Transaction Risk Process - 1
Managing intragroup transaction risk within financial conglomerates involves a structured process that encompasses risk identification, assessment, control,
monitoring, and reporting. This process ensures that the risks associated with transactions between entities within the same group are effectively managed
and mitigated. Here's an outline of the typical process:
1. Risk Identification:
 Identify all intragroup transactions, including loans, capital movements, service agreements, and other financial interactions.
 Understand the nature and purpose of each transaction, including its terms, conditions, and involved parties.

2. Risk Assessment:
 Evaluate the potential risks associated with each transaction, considering factors like credit risk, market risk, liquidity risk, operational risk, and compliance
risk.
 Assess the impact of these transactions on the financial health and regulatory compliance of each entity within the conglomerate.

3. Establishment of Policies and Procedures:

 Develop comprehensive policies and procedures for intragroup transactions, which include guidelines on pricing, terms, approval processes, and limits.
 Ensure that these policies are in line with regulatory requirements and best practices.

4. Setting Limits and Controls:

 Establish exposure limits to manage the concentration of risk and prevent over-reliance on intragroup transactions.

 Implement control measures such as transfer pricing controls to ensure transactions are conducted at arm’s length.

5. Implementation of Monitoring Systems:

 Utilize monitoring systems to track intragroup transactions in real-time.
 These systems should flag transactions that exceed set limits or appear unusual, prompting further review.
 Intragroup Transaction Risk Process - 2
6. Regular Auditing and Compliance Checks:
 Conduct internal audits and compliance checks to ensure adherence to policies and regulatory requirements.
 Audit processes should include verification of the appropriateness of terms and conditions of transactions.

7. Reporting and Documentation:

 Maintain thorough documentation of all intragroup transactions, including justifications for terms and pricing.
 Regularly report on these transactions to senior management and, where required, to regulatory authorities.

8. Training and Capacity Building:

 Train staff involved in managing and monitoring intragroup transactions to understand risks and controls.
 Enhance awareness among all employees about the importance of managing intragroup transaction risks.

9. Review and Update Process:

 Regularly review and update risk management processes, policies, and limits to reflect changes in the business
environment, regulatory landscape, and operational changes within the conglomerate.

10. Stress Testing and Scenario Analysis:

 Conduct stress tests and scenario analyses to evaluate the potential impact of adverse conditions on intragroup
transactions.
 Use the insights from these tests to enhance risk management strategies and contingency planning.
Intragroup Transaction Risk Control and
Monitoring
Controlling and monitoring intragroup transaction risks within financial conglomerates is essential to maintain financial stability and comply
with regulatory requirements. Effective risk management strategies include a combination of internal controls, policies, and oversight
mechanisms. Here are some key approaches:
1. Risk Assessment and Identification: Regularly assess and identify potential risks associated with intragroup transactions. This involves
understanding the nature, purpose, and complexity of these transactions and their impact on the financial health of the entities involved.
2. Policy Development and Implementation: Develop and implement robust policies and procedures governing intragroup transactions.
These policies should outline the terms, conditions, approval processes, and pricing mechanisms for such transactions.
3. Limit Setting and Exposure Management: Establish limits on exposures to intragroup transactions to avoid excessive concentration of
risk within the conglomerate. This includes setting caps on the size and volume of transactions between group entities.
4. Transfer Pricing Controls: Ensure that intragroup transactions are conducted at arm’s length and reflect market conditions. Transfer
pricing should be fair, transparent, and compliant with regulatory guidelines to avoid any form of value transfer that could harm the
financial position of any entity within the group.
5. Compliance with Regulatory Requirements: Adhere to all relevant regulatory requirements, including those related to capital adequacy,
related-party transactions, and exposure limits. This involves staying updated with changes in regulations and ensuring that intragroup
transactions are compliant.
6. Internal Auditing and Reporting: Implement an internal auditing system to regularly review and monitor intragroup transactions. Regular
reporting on these transactions should be made to senior management and, where applicable, to regulatory bodies.
7. Risk Monitoring Systems: Utilize advanced risk monitoring systems that can track and analyze intragroup transactions in real-time. These
systems should provide alerts for any transactions that exceed predetermined thresholds or appear unusual in nature.
8. Conflict of Interest Management: Establish mechanisms to manage and mitigate conflicts of interest that may arise from intragroup
transactions. This includes having independent reviews and approvals for significant transactions.
I ntra-Group Transaction

1) Process of Intragroup Transaction Risk

Management
Consists of Identification, measurement, monitoring, reporting and control, that focused on:
• Composition of transaction within threshold
• Fairness of transaction (arm’s length principle)
• Compliance to prevailing regulations
• Proper approval on the transaction
• Completeness of documentation/agreement

Note: Subsidiaries’ Risk Management monitor and control the Risk in each entity, while Risk
together with Finance monitor and control the Risk in an integrated manner within Financial
Conglomeration.

2) Risk Limit & Threshold

• Limit structure and threshold are per Financial Conglomeration and per entity
• Threshold breach escalation to BOD is the responsibility of Risk and Finance

3) Roles and Responsibilities

Govern the roles and responsibilities of each respective party on the process of Intra-Group Transaction Risk
Management

22
 Quantitative Parameters

23 No
The Composition of Intra-Group Transaction in Financial Threshold and Rating
Conglomeration 1 2 3 4 5
a. Total intra-group transaction
Total asset TOTAL

b. Total intra-group transaction including Off Balance Sheet

Total equity TOTAL

c. Total asset of Entity in FC from intra-group transaction

Bank

Total asset of the Entity Multifinance

Insurance
d. Total liabilities of Entity in FC from intra-group transaction Bank
Multifinance
Total asset of the Entity Insurance

e. Total income of Entity in FC dari intra-group transaction - Net

Bank

Net income of the Entity Multifinance

Insurance
f. Total expense of Entity in FC from intra-group transaction -Net
Bank

Net income of the Entity Multifinance

Insurance
g. Exposure to the controlling shareholder (including exposure of loan
and off balance sheet such as guarantee and commitment) against TOTAL
to Total Asset
h. Exposure arised from the placement of client assets to other
TOTAL
companies in one group
 Roles and Responsibilities
Main Entity BOC
24 Evaluate the accountability of Main entity BOD through periodic review.

BOD of Main Entity and LJK

Implement Intra-Group Transaction risk management including appove the risk limit and threshold.
Main entity BOD approve the policy and the amendment.

IRMC
Provide recommendation on the policy and monitor the risk through the Integrated Risk Profile report.

Division Roles and Responsibilities

Divisions in Main Entity Identify and ensure the Intra-Group Transaction done according
and Subsidiaries to the mechanism of risk control.
Subsidiaries’ Risk • Monitor and control the risk in each entity
Management and • Prepare the Intra-group Transaction report on quaterly basis
Accounting
• Conduct the follow up action if there is a deterioration of risk
rating
Main entity Risk • Monitor and control the risk in an integrated manner within
Management and Financial Conglomeration
Finance • Prepare the Integrated Intra-group Transaction report on
quaterly basis
• Conduct the follow up action if there is a deterioration of risk
rating
Insurance Risk
 Insurance Risk
Insurance risk is defined as the uncertainty regarding the occurrence, timing, or extent of a loss or event for
which an insurance policy provides coverage. In the context of an insurance company, it refers to the potential
for financial loss or variability in outcomes due to this uncertainty. Key aspects of insurance risk include:
1. Occurrence of Insured Events: The risk that the events an insurance policy covers (like accidents, natural
disasters, or illnesses) will occur, leading to claims from policyholders.
2. Severity and Frequency of Claims: The potential variability in the number and size of claims. More frequent
or severe claims than anticipated can impact an insurer's financial stability.
3. Uncertainty of Timing: The unpredictability regarding when claims will be made. This uncertainty can
complicate financial planning and reserve setting for insurers.
4. Estimation of Liabilities: The risk associated with estimating the liabilities arising from insurance contracts,
particularly for long-term policies where assumptions about future trends (like mortality rates or healthcare
costs) can change over time.
Insurance risk is fundamental to the insurance business model, as insurers pool these risks from many
policyholders and charge premiums to cover potential claims, expenses, and to earn a profit. Managing
insurance risk effectively is crucial for the sustainability and success of insurance companies.
 Key Components in Insurance Risk -1
1. Underwriting Risk: The risk that the premiums charged will not be enough to cover claims and operational
expenses. This arises from inaccuracies in assessing the risk of potential policyholders and pricing policies
accordingly.
2. Claim Risk: The risk related to the frequency and severity of claims. Insurers must predict the likelihood and
cost of claims for various scenarios, which can be uncertain.
3. Pricing Risk: Related to underwriting risk, this is the risk that the premiums set for insurance policies do not
accurately reflect the actual risk of loss.
4. Reserving Risk: The risk that the money set aside (reserves) to pay future claims is insufficient. Inaccurate
reserve estimation can lead to significant financial strain on the insurer.
5. Reinsurance Risk: This is the risk that the reinsurance coverage an insurer relies on is inadequate, either
because the reinsurer fails to fulfill its obligations or because the coverage limits are insufficient.
6. Investment Risk: The risk associated with the investment activities undertaken by the insurer with the
premium income. This includes market risk, credit risk, and interest rate risk.
 Key Components in Insurance Risk - 2
7. Liquidity Risk: The risk that the insurer may not have enough liquid assets to meet immediate financial
obligations, especially in the event of large or unexpected claims.
8. Operational Risk: Includes risks arising from the insurer's business operations, such as system failures, fraud,
errors, or external events that disrupt operations.
9. Legal and Regulatory Risk: The risk of changes in legal or regulatory frameworks that could affect insurance
operations, product offerings, or financial standing.
10. Market Conduct Risk: This involves the risk of loss resulting from the company's business practices, including its
sales techniques, policy administration, and claims handling processes.
11. Catastrophic Risk: Specific to property and casualty insurers, this risk involves potential losses due to
catastrophic events like pandemics, earthquakes, floods, or hurricanes. These events can lead to large-scale
claims within a short period.
12. Mortality/Morbidity Risk: For life and health insurers, this risk pertains to the uncertainty in predictions about
mortality (death) rates and morbidity (illness, disability) rates. Variations from expected rates can significantly
impact the financial outcomes for these insurers.
Insurance Risk Framework - 1
An insurance risk framework is a structured approach used by insurance companies to identify, assess, manage, and
monitor the various risks associated with their operations. This framework is integral to the insurer's overall risk
management strategy and is designed to ensure financial stability and compliance with regulatory requirements.
A comprehensive insurance risk framework typically includes the following components:
1. Risk Identification: This is the first step where the insurer identifies all potential risks that could impact its business.
This includes underwriting risk, investment risk, operational risk, legal and regulatory risks, and any other relevant
risks.
2. Risk Assessment and Quantification: Once risks are identified, the next step is to assess and quantify them. This
involves analyzing the likelihood of occurrence and potential impact on the company. Tools such as actuarial models,
statistical analysis, and scenario planning are used for this purpose.
3. Risk Appetite and Tolerance: The insurer defines its risk appetite, which is the amount of risk it is willing to accept in
pursuit of its business objectives. Risk tolerance is the specific level of risk that the company can bear, which is aligned
with its risk appetite.
4. Risk Mitigation Strategies: Based on the assessment, the insurer develops strategies to mitigate risks. This can include
diversifying investments, improving underwriting practices, purchasing reinsurance, implementing robust operational
controls, and compliance programs.
5. Risk Monitoring and Reporting: Continuous monitoring of risk exposure is vital. The insurer needs to have systems in
place for ongoing monitoring of its risk profile and for reporting risks to management and regulatory authorities. This
should include regular reviews to identify any new risks or changes in existing risks.
Insurance Risk Framework - 2
6. Risk Governance: Effective governance structures are essential for overseeing the risk management
process. This typically involves a risk management committee or a similar body that sets risk
management policies and ensures their implementation.
7. Compliance with Regulatory Requirements: Insurers must ensure that their risk framework complies
with regulations set by insurance regulatory authorities. These regulations often dictate minimum
standards for risk management, capital adequacy, and solvency.
8. Integration with Business Strategy: The risk management framework should be integrated with the
insurer’s overall business strategy. This ensures that risk management considerations are embedded
in decision-making processes across the organization.
9. Technology and Data Analytics: Leveraging technology and data analytics can enhance the
effectiveness of the risk framework. Advanced analytics can provide deeper insights into risk trends
and help in developing more accurate predictive models.
10. Continuous Improvement and Adaptation: The risk management framework should be dynamic,
capable of evolving in response to changes in the market, regulatory environment, and the insurer's
own business model.
11. Stress Testing and Scenario Analysis: Regular stress testing and scenario analysis help in
understanding the potential impact of extreme events and adverse conditions on the insurer's risk
profile.
Insurance Risk Control and Monitoring - 1
Insurance risk control and monitoring are critical aspects of an insurer's risk management framework. These processes involve
implementing measures to mitigate identified risks and continuously overseeing the effectiveness of these measures. Here's a
breakdown of how insurance risk control and monitoring typically work:
1. Risk Control Strategies:
 Implement underwriting standards and guidelines to manage underwriting risk.
 Diversify the insurance portfolio to spread risks across different types of policies and geographic areas.
 Utilize reinsurance arrangements to transfer a portion of the risk to other insurers.
 Establish strict investment policies to manage investment risk, focusing on diversification and asset-liability matching.
 Develop comprehensive operational controls, including IT security measures, to mitigate operational risks.
2. Regular Monitoring:
 Continuously monitor risk exposures to ensure they remain within the set risk appetite and tolerance levels.
 Track key risk indicators (KRIs) that signal changes in risk levels.
 Review the effectiveness of risk control measures and adjust them as needed.
3. Compliance Checks:
 Regularly assess compliance with internal policies and regulatory requirements.
 Conduct internal and external audits to ensure adherence to risk management protocols.
4. Reporting Systems:
 Implement a robust risk reporting system to provide timely and accurate information to management and relevant committees.
 Reports should include details on risk exposures, breaches of limits, and the effectiveness of risk mitigation strategies.
Insurance Risk Control and Monitoring - 2
5. Stress Testing and Scenario Analysis:
 Conduct stress tests and scenario analyses to evaluate the potential impact of adverse events on the insurer's financial position.
 Use the insights from these analyses to refine risk control measures.

6. Claims Management:
 Develop effective claims management processes to ensure timely and accurate claims settlement.
 Monitor claims trends and loss ratios to identify potential underwriting issues.

7. Asset-Liability Management:
 Align the investment strategy with the nature of insurance liabilities to manage liquidity risk and ensure the insurer can meet its
obligations.

8. Training and Awareness:

 Train employees on risk management practices and the importance of risk controls.
 Promote a risk-aware culture throughout the organization.

9. Continuous Improvement:
 Regularly review and update risk control and monitoring processes to reflect changes in the business environment, regulatory
landscape, and emerging risks.

10. Integration with Business Strategy:

 Ensure that risk control and monitoring are integrated with the overall business strategy and objectives of the insurance company.
 Insurance Capacity - 1
Insurance capacity refers to the maximum amount of risk that an insurer or the insurance market as a whole can underwrite while maintaining financial
stability. It's a critical concept in the insurance industry, impacting both insurers and policyholders. Here are key aspects of insurance capacity:
1. Individual Insurer Capacity:
 Determined by an insurer's financial strength, including its capital, reserves, and reinsurance arrangements.
 Higher capitalization and effective risk management allow an insurer to underwrite more risks or larger policies.

2. Market Capacity:
 Refers to the total amount of risk that can be absorbed by the entire insurance market.
 Influenced by the overall capital, reinsurance availability, and appetite for risk across all insurers operating in the market.

3. Factors Affecting Capacity:

 Economic Conditions: Economic downturns or financial crises can reduce capacity as insurers’ assets may lose value.
 Regulatory Changes: Stricter solvency requirements can impact insurers' ability to underwrite new policies.
 Reinsurance Market: The availability and cost of reinsurance can significantly affect an insurer's capacity.
 Catastrophic Events: Large-scale claims from disasters like hurricanes or earthquakes can deplete insurers’ reserves, reducing capacity.
 Technological Advances: Improved risk assessment tools and predictive modeling can increase capacity by better managing risks.

4. Capacity Management:
 Insurers must balance underwriting enough policies to be profitable while not exceeding their capacity to avoid solvency issues.
 Strategies include purchasing reinsurance, diversifying risk portfolios, and adjusting underwriting criteria.
Insurance Capacity - 2
5. Reinsurance as a Capacity Tool:
 Reinsurance agreements allow insurers to transfer portions of their risk, thereby increasing their underwriting capacity.
 Both treaty and facultative reinsurance contribute to enhancing an insurer’s capacity.
6. Capacity Fluctuations:
 Insurance capacity is not static; it fluctuates based on market conditions, loss experiences, and changes in the broader economic
environment.
7. Impact on Premiums and Coverage:
 When capacity is high, insurance is typically more readily available, and premiums may be lower.
 Reduced capacity can lead to higher premiums, more restrictive terms, and less availability of certain types of insurance
coverage.
8. Capacity in Specialized Markets:
 For specialized or high-risk areas (like aviation, marine, or catastrophic risks), capacity is closely watched as these markets can be
more volatile.
9. Global Factors:
 Global events and trends can affect capacity worldwide, especially in interconnected areas like reinsurance.
10. Technology and Innovation:
 Advancements in data analysis, artificial intelligence, and risk modeling can increase capacity by improving risk prediction and
management.
 Insurance Treaty - 1
An insurance treaty, often referred to in the context of reinsurance, is a formal agreement between an insurance
company (the cedent) and a reinsurance company (the reinsurer). Under this agreement, the reinsurer agrees to
assume a portion of the insurance company's risk in exchange for a share of the premiums. Treaties are foundational
tools in the reinsurance industry, allowing primary insurers to manage their risk exposures more effectively. Here are
key aspects of insurance treaties:
1. Proportional Treaties:
 Quota Share Treaty: The reinsurer takes a fixed percentage of all the risks in the cedent's portfolio. In return, the reinsurer
also receives the same percentage of premiums and pays the same portion of claims.
 Surplus Treaty: The reinsurer covers the amount of risk that exceeds the cedent’s retention limit. The coverage is provided
up to a specified limit, and premiums and losses are shared proportionally.
2. Non-Proportional Treaties:
 Excess of Loss Treaty: The reinsurer covers losses that exceed the cedent's retention limit, up to a certain level. This type of
treaty is commonly used for catastrophic risks.
 Stop Loss Treaty (or Aggregate Excess of Loss): The reinsurer compensates the cedent for all losses over a specified amount
during a specific period. This is typically used to protect against an accumulation of small losses.
3. Facultative Reinsurance: This is not a treaty but a separate arrangement where the reinsurer considers individual
risks presented by the cedent and decides on a case-by-case basis whether to accept the risk.
 Insurance Treaty - 2
4. Treaty Terms and Conditions:
 Coverage Scope: Defines what types of risks are covered.
 Limits of Liability: Maximum amount the reinsurer will pay.
 Retention or Deductible: The loss amount retained by the cedent.
 Exclusions: Specific conditions or types of risks not covered by the treaty.
 Premiums: The payment structure for the reinsurance coverage.
 Duration: The period for which the treaty is valid.
5. Benefits of Reinsurance Treaties:
 Risk Transfer: Allows primary insurers to transfer a portion of their risks, reducing their overall risk exposure.
 Capital Relief: Helps in managing capital requirements by spreading risks.
 Stabilization: Provides stability to the insurer’s financial performance, especially against catastrophic events.
 Capacity Expansion: Enables insurers to underwrite more policies than their individual capital bases would ordinarily allow.
6. Regulatory and Compliance Considerations:
 Treaties must comply with regulatory standards in the jurisdictions where the insurers and reinsurers operate.
 Transparency and proper documentation are crucial for regulatory compliance.
7. Negotiation and Customization:
 Reinsurance treaties are often subject to negotiation and can be tailored to specific needs of the cedent and capabilities of the reinsurer.
 Facultative Reinsurance - 1
Facultative reinsurance is a type of reinsurance where an insurance company (the cedent) negotiates with a reinsurer to transfer
specific individual risks. Unlike treaty reinsurance, which covers a broad range of risks under a single agreement, facultative
reinsurance is arranged on a case-by-case basis. Here are the key aspects of facultative reinsurance:
1. Individual Risk Assessment:
 Each risk is individually underwritten and assessed by the reinsurer.
 The decision to accept the risk and the terms of coverage are specific to each individual risk.
2. Negotiation of Terms:
 Terms, including coverage limits, premiums, and exclusions, are negotiated for each risk.
 The process allows for a high degree of customization to meet specific needs.
3. Use Cases:
 Often used for large or unusual risks that do not fit well into standard treaty reinsurance programs.
 Common in sectors like property, marine, aviation, and certain types of liability insurance.
4. Capacity:
 Facultative reinsurance provides additional capacity to the cedent, allowing it to underwrite risks that exceed its retention limits.
 This can be crucial for writing large policies or covering high-risk exposures.
5. Risk Management:
 Allows insurers to manage their risk portfolios more precisely by choosing specific risks to cede.
 Helps in maintaining a balanced and diversified risk portfolio.
 Facultative Reinsurance - 2
6. Expertise and Specialization:
 Reinsurers with specialized knowledge and expertise can provide valuable insights and risk assessments for unique
or complex risks.
7. Pricing:
 Pricing is generally based on the characteristics of the individual risk, reflecting its unique nature.
 Can be more expensive than treaty reinsurance due to the bespoke nature and administrative costs of individual risk
assessment.
8. Documentation and Compliance:
 Each facultative reinsurance arrangement requires its own contract or certificate, detailing the terms and conditions.
 Must comply with regulatory requirements in relevant jurisdictions.
9. Relationships:
 Facilitates direct relationships between cedents and reinsurers, often leading to better understanding and
cooperation.
10. Flexibility:
 Offers flexibility to the cedent in terms of risk transfer options, particularly for risks that are difficult to place in the
treaty market.
 Key Ratios in Insurance - 1
key capital ratios are used to assess the financial strength and stability of an insurance company. These ratios provide
insights into the insurer's ability to meet its obligations and withstand financial stress. The most important capital
ratios and their calculations are as follows:
1. Solvency Ratio:
1. Calculation: Solvency Ratio = (Net Assets / Liabilities) × 100
2. This ratio measures the ability of an insurer to meet its long-term obligations. A higher solvency ratio indicates a more
financially stable company with greater ability to cover its liabilities. Net assets are calculated as total assets minus total
liabilities.
2. Risk-Based Capital (RBC) Ratio:
1. Calculation: RBC Ratio = (Total Adjusted Capital) / (Required Capital)
2. This ratio is used to determine the minimum amount of capital an insurance company needs to support its overall business
operations in consideration of its size and risk profile. Total Adjusted Capital refers to the insurer's actual capital available,
and Required Capital is the amount of capital the insurer needs to cover its various risks (like underwriting, credit, and
investment risks).
3. Leverage Ratio:
1. Calculation: Leverage Ratio = (Total Liabilities) / (Policyholders’ Equity)
2. This ratio indicates the extent to which the insurer's operations are financed by debt. A higher leverage ratio can imply
higher financial risk.
Key Ratios in Insurance - 2
4. Reserve to Surplus Ratio:
 Calculation: Reserve to Surplus Ratio = (Policy Reserves) / (Policyholders’ Surplus)
 This ratio compares the reserves set aside for claims (Policy Reserves) to the excess of assets over liabilities
(Policyholders’ Surplus). It helps in assessing the adequacy of reserves in comparison to the insurer’s capital
cushion.
5. Combined Ratio (specific to property and casualty insurance):
 Calculation: Combined Ratio = (Loss Ratio + Expense Ratio)
 The loss ratio is calculated as (Incurred Losses + Loss Adjustment Expenses) / Earned Premiums. The expense
ratio is (Underwriting Expenses / Written Premiums). A combined ratio over 100% indicates that the insurer’s
underwriting operations are not profitable.
6. Capital Adequacy Ratio:
 Calculation: Varies based on regulatory guidelines and internal risk assessments.
 Generally, this ratio assesses the insurer’s capital in relation to its risk exposure. Regulators may have specific
formulas for calculating this ratio, which consider various risk factors.
7. Liquidity Ratio:
 Calculation: Liquidity Ratio = (Liquid Assets) / (Short Term Liabilities)
 This ratio measures the insurer’s ability to quickly convert assets into cash to meet short-term liabilities.
Higher liquidity suggests a better ability to meet immediate obligations.
 Other Ratios in Insurance - 1

1. Loss Ratio:
 Measures the proportion of premiums that an insurer pays out in claims.
 Calculated as Loss Ratio = (Claims Paid+Claims Reserve Adjustments) / (Premiums Earned).
 A high loss ratio indicates higher claims, which could be a sign of underpricing or increasing risk exposure.
2. Expense Ratio:
 Reflects the company's operational efficiency by comparing its underwriting expenses to its earned premiums.
 Calculated as Expense Ratio = (Underwriting Expenses) / (Premiums Earned)
 A lower expense ratio suggests better operational efficiency.
3. Return on Equity (ROE):
 Indicates the profitability relative to the shareholders' equity.
 Calculated as ROE = (Net Income) / (Shareholder’s Equity)
 A higher ROE suggests more effective use of equity to generate profits
 Other Ratios in Insurance - 2
6. Investment Yield:
 Measures the return on investments made by the insurer.
 Calculated as Investment Yield = (Investment Income) / (Total Invested Assets)
 Indicates the effectiveness of the company’s investment strategy.
7. Retention Ratio:
 Shows the percentage of premiums retained after ceding to reinsurance.
 Calculated as Retention Ratio = (Net Premiums Written) / (Gross Premiums Written)
 A lower ratio indicates higher dependence on reinsurance.
8. Claims Settlement Ratio:
 Indicates the proportion of claims settled by the insurer out of the total claims received.
 A higher ratio is generally seen as positive, reflecting customer satisfaction and reliability.
9. Operating Ratio:
 Assesses operational efficiency by adding the operating expenses ratio to the loss ratio.
 Lower operating ratios indicate more efficient operation.
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