Embracing the Unpredictable: The Evolving Role of Risk Management in Insurance

While digitisation has helped the organisations to stay competitive and serve the customer in a paperless manner, it also exposes various cyber threats shared Sunder Natarajan, Chief Risk Officer, IndiaFirst Life Insurance, in an exclusive interaction with Srajan Agarwal of Elets News Network (ENN)

Could you elaborate on the key risk management strategies you have implemented to ensure the organisation s financial stability and protect policyholders interests in the ever-evolving insurance landscape?

All insurance companies need to maintain a level of capital to support the minimum solvency requirement by the regulator (IRDAI) and to ensure that the policyholder’s interests are protected under all circumstances. In the current landscape where insurance penetration is low and a mandate coming from our regulator for providing insurance for all by 2047, we have adopted an approach “To support growth with controls’’.

The organisation has a board approved risk appetite statement with defined guardrails that serve as triggers for escalations and action. Since insurance by its nature makes good for financial losses of the family of policyholders, a robust risk management framework is required for the financial stability of the company.

We have implemented hedging strategies through forward rate agreements with a number of counterparties. This has helped the company to mitigate the impact of interest rate volatility and gaps arising therefrom. It also helps to manage reinvestment risk and increase the duration of assets to reduce the ALM mismatch risk present in the portfolio.

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As a company, we focus and adopt good governance practices enterprise-wide. The processes are designed to keep the policyholder’s interest as a key priority. One of the core objectives is an ongoing improvement in the net promoter score through an improved customer service experience. All our processes are supported by standard SOPs. These are also reviewed annually to incorporate best practices in the ever-changing environment. This improves productivity, helps in cost optimisation, and we are able to serve our customers better and faster.

The insurance industry often faces complex risks related to investment portfolios and market volatility. Could you shed light on how IndiaFirst Life Insurance navigates these risks, including the strategies you employ to manage investment risks and ensure sustainable growth while maintaining adequate solvency levels?

Indiafirst Life has a Board approved Investment policy that defines the Investment ethos and provides steer to the organisation. The Investment department follows the investment philosophy to deliver consistent and stable returns to the policyholders as per an annual operating plan. The investment policy specifies Risk and Return profile, Investment objective and an Asset Allocation pattern to be followed for each Fund. This results in achieving the desired returns on investment whilst being compliant with the guidelines. Strategic Asset Allocation (SAA) is conducted to identify the optimal asset mix which will maximise the return while maintaining the risk associated within acceptable limits.

The company has put in place a credit research and review process. A credit review of companies under the portfolio is done and the results are placed before the Investment Committee. The organisation had taken a conservative approach on the financial services sector through Covid resulting in no losses on account of default.

The company has an Asset Liability Committee (ALCO) for an ongoing process of formulating, implementing, monitoring, and revising strategies related to assets and liabilities to achieve an organisation’s financial objectives. The ALCO lays down the framework to ensure that the company invests in a manner that would enable it to meet its cash flow needs and capital requirements at a future date. The duration and cash flow is monitored from time to time in the ALCO and management of liquidity risk is done in accordance with investment policy.

How does IndiaFirst Life Insurance strike a balance between innovation and risk management to deliver tailored products and services and effectively manage potential risks associated with the new offerings?

Our country has so much diversity both geographical and demographic that one size fits all never works for any kind of business. This calls for innovation in developing tailored products and services. At IndiaFirst Life, the Product and Actuarial functions are constantly collaborating to launch new products with a value proposition that takes care of the interests of all stakeholders. A product management committee composed of stakeholders across functions is vested with the responsibility of approving products that will deliver value to customers, distributors, and shareholders, whilst being compliant with the law of the land.

While digitisation has helped the organisation to stay competitive and serve the customer in a paperless manner, it also exposes various cyber threats. At IndiaFirst Life, our information security has devised a multi-layered approach towards security. It focuses on what is required to protect most and is the best way to protect the organisation. With this approach, the organisation reduces the risk of successful attack and mitigates the impact of a breach. This also helps in protecting the data of the organisation and customers.

Nowadays there is a lot being talked about about climate risk and how various aspects can be included in the larger business strategies to achieve sustainable development goals outlined by the UN. With a view to being responsible towards our planet and humankind at large, we have formulated a board-approved ESG policy. This helps in achieving stronger governance with more focus towards social contribution and leading the organisation towards being environment friendly.

The industry today is facing a bigger challenge in terms of controlling the frauds arising rapidly. The organisation has taken a proactive fraud control measure and propensity to fraud/litigate model that helps in plugging the leakages while protecting the larger policyholder interest.

Ahead to the future, how do you see the role of risk management evolving, both within IndiaFirst Life Insurance and across the broader business landscape?

The insurance industry is on the path of an unprecedented growth trajectory. This also exposes the company with various unanticipated risks. External influences such as geopolitical shifts, emerging areas of concern like climate change, and the increased use of technology have significant impacts on organisation and industry. These can impact the health of financial institutions if not addressed promptly.

The regulator aims to ensure the longterm health and stability of the insurance sector and has started a journey to adopt a holistic approach towards Risk Based Supervision. This approach will evaluate the insurer’s financial condition, risk profile, and effectiveness of their corporate governance.

The industry is likely to move towards a RiskBased Capital (RBC) requirement to ensure that insurance companies can fulfill their financial obligation toward policyholders. The determination of the statutory minimum level of capital is likely to be based on the size of the insurance company and the inherent risk of the company’s financial assets and operations. Simply putting, the company will be required to hold capital in proportion to its risk.

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In addition to the above, the changing environmental factors will influence the underwriting, investment philosophy, and channel growth and the company will have to mold its business strategies very quickly to adapt to changes and grab the growth opportunities arising out of it.

The company’s risk management approach and objective have to factor in all such black swan and grey rhino events and should strengthen the processes that can sustain and withhold these future shocks. A lot can be done through stress testing and scenario analysis by building internal risk/financial models that can use the available data and then are shocked to give a probable impact if the event occurs at various intervals. This is easier said than done but as we have seen during the pandemic, those who will be better prepared and resilient, will sail through and encash the opportunities which accompany them.