Review
Risk management
Principal risks and uncertainties
Amlin categorises risk closely to that as laid out by the Financial Services Authority (FSA). The risk categories and a brief commentary for Amlin are discussed below:
Underwriting risk: The risk of loss arising from the inherent uncertainties in the occurrence, amount and timing of insurance liabilities and premiums.
The scope of underwriting risk covers underwriting, reserving, claims and reinsurance (excluding credit risk). The Underwriting Directors of Amlin London, Amlin UK, Amlin Bermuda and AFU are the principal risk owners and underwriting is delegated through senior management to Class Underwriters of Syndicate 2001, Amlin Bermuda and AFU. Risk management is exercised through careful planning and monitoring, the setting of maximum risk and catastrophe exposure limits and through the day to day pricing and risk selection activities of our underwriters.
Amlin is exposed to underwriting risk from both unexpected attritional loss, which can be caused by inadequate pricing and/or unexpected claims frequency, and catastrophe losses from large natural or non-elemental events such as earthquake, hurricane or terrorism threats.
Credit risk: The risk of loss if a counterparty fails to perform its obligations or fails to perform them in a timely fashion.
Counterparties include reinsurers, brokers, insured and reinsured clients, coverholders and investment counterparties. Credit risk falls under the ownership of the Group Finance Director and is managed by the broker credit control teams, Reinsurance Security Committee, reinsurance collection team and investment team.
Market risk: The risk arising from fluctuations in values of, or income from, assets, in interest rates or in exchange rates.
The Group Finance Director is responsible for market risk and day to day management is delegated to the Chief Investment Officer. The development of our investment risk management capability has been enhanced in 2008 through the employment of a Head of Investment Risk who reports to the Chief Risk Officer. It is intended, following development of appropriate models, that he will be responsible for the monitoring of market risk.
Liquidity risk: The risk arising from insufficient financial resources being available to meet liabilities as they fall due.
The scope of liquidity risk includes managing unexpected changes in funding sources, market conditions and cash flow planning. Liquidity risk is owned by the Group Finance Director and is managed within the Finance and Group Investment teams. The key feature of managing liquidity risk at Amlin is to understand, model and cater for the financial demands of one or a series of major insurance losses.
Operational risk: Risk resulting from inadequate or failed internal processes, people and systems, or from external events, including regulatory control failures.
Our approach is to split operational risk into the risk of control failure, which is covered within each specific risk area and external risk events or internal generic risk such as fraud, which are handled as a separate risk category. Operational risk is owned by the relevant managing director and managed by operational managers and the Human Resources Director. There are regular operational management reports on the status of key controls. Business continuity risk and planning is regularly reviewed and tested.
Strategic risk: Risk associated with the appropriateness of business strategy in the face of the current and future commercial, political, legislative and economic environment.
Strategic risk is owned by the Chief Executive and is regularly reviewed by executive management and the Board. It is a prime focus of the Executive Strategy Group and the bi-annual management conference.
The detailed risk disclosures for underwriting, credit, market and liquidity risk are set out in detail in the financial statements.
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Underwriting – catastrophe risk: effect of one or more catastrophe losses on the Group profit and balance sheet. |
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Underwriting – attritional losses: unexpected or unbudgeted increase in cost of small or large insurance claims on Group profit. |
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Underwriting – reserving risk: unexpected or unbudgeted increase in claims emanating from business written prior to the current underwriting year. |
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Market – foreign exchange volatility: impact on value of balance sheet or earnings arising from movement in value of sterling against key currencies of US dollar, euro and Japanese yen. |
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Market – investment market volatility: a fall in the market value of investments. |
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Credit – reinsurance counterparty financial failure: Counterparties fail to meet financial obligations |
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