Mike Ashurst:

Welcome everyone, and thank you for joining us today. I’m Mike Ashurst from and I’m excited to moderate this webinar on Holistic balance sheet management, or HBSM: supporting insurers’ strategic objectives. We have two experts here to lead the discussion. We have Yuriy Krvavych, who’s the Managing Director of Risk Intelligence and Strategic Advisory at the ICMIF supporting member, Guy Carpenter, in the UK. And we have William Gibbons, who’s Principal in Insurance Investments at Mercer, also in the UK. Guy Carpenter and Mercer are both parts of Marsh Mclennan, combining expertise in risk and reinsurance with investment management for a comprehensive approach to HBSM. So today, Yuriy and William will cover strategies for aligning risk management and investments, addressing the unique challenges for mutuals and cooperatives.

Now, if you have any questions throughout the presentation, please put them into the chat and we’ll get to those at the end. So without further ado, I’ll hand you over to Yuriy and William to explore how these strategies can help your organisations to thrive. Over to you. Thank you.

Yuriy Krvavych:

Thanks, Mike. Hello and welcome everyone. We are very excited to have you join us today as we explore key insights and innovations of risk management in insurance. In today’s presentation, we will introduce the holistic balance sheet management framework, or HBSM for short, highlighting its main attributes such as risk appetite and evaluation of strategies, and focusing on its applications.

Before doing this, we will briefly touch on insurance fundamentals just to make sure that we’re on the same page in terms of understanding risk and insurance. More specifically, we will be talking about the important societal role of insurance, the notion of risk in insurance, its complexities, how insurers make, create, value, as well as explaining the importance of using the integrated risk management in value creation. In concluding this presentation, we will tell you a bit about what we do at GC and Mercer and how we could help you implement effective HBSM to support sustainable value creation.

Right, so let’s talk a little bit about fundamentals to start with. So insurance is vital for socioeconomic activity, surely. It mitigates risks that would otherwise be too dangerous to undertake. Insurance is historically rooted in bottomry contracts, so-called bottomry contracts used in Ancient Babylon, and also cargo allocation arrangements used in Ancient China during the second millennium BC. Over time, insurance has evolved through and thrived on such main principles as risk pulling and risk transfer.

So insurance entities, they play an important role as they facilitate pulling and sharing societal risks, whereas reinsurers, they come to play and they enhance this further by providing risk transfer solutions and enabling risk sharing among insurers. Insurance entities, they create value in a specific way. So they create value by taking risks, further transforming them by using risk transfer and risk funding solutions, and then controlling and actively managing them.

The way the insurance business is run and managed is fundamentally different from how it is done in finance or manufacturing. Insurance business itself is inherently risky and it’s mainly due to the contingent nature of its production costs and heightened downside risk. So insurers simply, they leverage themselves by raising their primary debt in the form of promissory notes, as we know called insurance policies. So what that means, that means that that is considered risky, and risky due to the three-dimensional uncertainty. So it’s uncertainty in timing, frequency and impact of insurance events.

Also, insurers face specific risk profiles and deal with them. Those risk profiles are having the tail by the unpredictable nature of insurance events. And also those risk profiles are asymmetric, with a tendency of being skewed towards more adverse outcomes.

Bringing all these complexities together, what it tells us is that for insurers to navigate through those complexities and fulfil their promises to policyholders and create value for their stakeholders, they would need to really take a little bit more holistic view, use more integrated kind of risk management to navigate those different complexities and their moving parts. So in this presentation we present HBSM and advocate for it as one of the effective forms of integrated risk management in insurance.

So let’s talk about quickly what is risk in insurance? I mean from our experience talking to different people, we often get different interpretation or description of what that actually entails. So risk in insurance, the way we see, it’s simply the possibility of having adverse performance outcomes from business activities such as insurance, investment, operations, that result in low capital performance or even capital consumption. Put it simply, adverse performance outcomes occur when earnings materialise below the KPI set in the balance sheet.

Also, metaphorically, risk could be seen as something that comes out of the Pandora’s box. Once out and taken, it can never be compartmentalised again. That means that knowing your palatable risk is key to value creation, as it’s costly to offload initially assumed unpalatable and unwanted portions of risk. All that obviously requires a great deal of risk expertise to be able to navigate through this complexity of insurance business and manage risk and avoid catastrophe of different kind and be able to create value. And obviously as we know, actuaries and risk managers are playing a special role in all this.

Another fundamental aspect of insurance that we would like to discuss briefly here is downside risk. I believe the best description of what it entails was provided in Stephen Catlin’s book on risk and reward in property and casualty insurance. So here’s an extract from that book describing Stephen’s encounter with an investment banker from Lehman Brothers, probably not long before their collapse, I would guess. So basically that tells you how people in investment banking usually perceive downside risk. Obviously different to how we see it on the insurance side.

But most importantly, Stephen provides a good description of what downside risk is. So basically according to him, the downside risk is the possibility of experiencing significant adverse outcomes that would force an insurance entity to cease trading and thus be unable to meet its obligations to policyholders. I think that’s a very simple, yet powerful description of downside risk. As we will see later in this presentation, understanding downside risk is key to calibrating risk appetite, which is another important attribute of HBSM framework.

Right, so now we’re going to consider, talk a little bit about the main constructs of HBSM. There’s a P&L and balance sheet and distresses and the causes of P&L and balance sheet distress. So I’m going to start from the L side of the balance sheet, so everything on that side boils down to getting your liability value modelled correctly. So it means that the insurers, they need to make sure that they price the risk they take appropriately, so it has adequate pricing, getting the right level of expected loss, plus loading that amount with a risk load to arrive at the competitive premium that is linked to risk appetite and such that could provide funding to fund the return on capital. And also taking into account the portfolio balance, taking into account the diversification and risk pulling effect.

Also, most importantly, it’s all about gaining insight into the risk concentration in detail, hence getting your CAP risk modelling right. Reserving is also important, especially for long tail, when insurance entities writing long tail businesses. So it’s all about ensuring that the reserving is adequate, so the right level of best estimate, the risk margin is adequate, and with the proper links to risk appetite in macroeconomics such as discounting and inflation.

Now I’m going to pass that on to William to comment on the A side of the balance sheet.

William Gibbons:

Yeah, thanks Yuriy. So maybe if we can flip to, I think there’s another box coming up. Yeah, so looking at the market value of assets and market risk, so we look at things like interest rate risk, which is clearly a link between assets and liabilities because of liability discounting, at least on an economic basis, equity risk, property risk, and also counterparty risk and other risks.

So I think one thing that’s important to remember is that insurers’ asset portfolios will inevitably carry investment risk. So clearly, what you can observe, we see it for example in the UK post the budget, bond prices can fluctuate dramatically, clearly share prices can move, and even cash at the bank can carry credit risk. You think it’s a certain amount of money and it’s constant and it’s just going to grow by whatever the interest rate is. But if we look back to the experience for example with SVB a couple of years ago, that wasn’t necessarily always a dead certain outcome, should I say.

One positive about taking investment risk, this is coming onto interconnectivity, is that it generally seems to diversify well against liability side risk. So the risk of loss through adverse claims is generally unconnected to investment losses, though not always. And also hard and soft insurance market conditions don’t seem to be particularly correlated with macroeconomic conditions. We’ll come onto this, and that’s interesting and potentially positive if you’re looking to invest dynamically, because potentially you can take more investment risk at times with the softer market, maybe underwrite in slightly different ways, and vice versa when markets are hard and credit spreads are tight and so on.

At the same time, it is important to consider potential linkages, for example inflation and the cost of addressing claims, they will be linked to inflation and the broader economy, although correlation clearly isn’t 100%. And there’s potential for impact on currencies as well, as you might think about commodity currencies and other currencies where there could be something which crops up.

Yuriy Krvavych:

And to finish the discussion of this slide, the last bit that comes to play here is the risk management, and specifically risk management instruments. Because one thing is understanding what drives variability of value of liability and assets in a balance sheet, another thing what to do about it. And it’s all about risk management instruments, solutions.

And here we’re talking about, earlier we mentioned risk pooling and risk transfer as the main principles of insurance, but risk transfer, yeah, there are different sorts and types of risk transfer, but the one important thing is that once a particular tranche of risk is getting offloaded, that has consequences on the portfolio diversification, the resulting diversification of the portfolio. So that’s another thing that many people don’t take into account, but it is an important thing to contrast. So yes, it comes with the benefits of offloading a particular unwanted part of your risk, but that benefit’s going to be offset with other kind of downside on reduced diversification.

Equally, diversifying your hedging, so it’s a matter of what risk and how they’re getting bundled and pooled. So pooling more less positively correlated risks, that’s what we know creates diversification. But also bundling those risks that are more negatively correlated creates different types of hedges, be it natural hedges or financial hedges in your P&L and how to manage the bottom line of P&L. Asset liability matching, that’s also important. That actually helps to manage the cash flow on both sides of the balance sheet and also liquidity. Risk financing, that’s all kind of, once the risk is taken and then transformed and transferred, whatever is retained would need to be funded. And there are different forms of funding, so that’s also comes with different instruments.

So the next bit is in this introductory part on insurance fundamentals, there are different moving parts in terms of different conflicting priorities I would say, when we talk about the balance sheet management and specifically taking holistic view of it. So first, it comes with objectives and there’s priorities which are stipulated in risk appetite. So insurers would be focusing on being profitable, achieving certain growth targets, whilst protecting solvency and being resilient to financial distresses. Also making sure that you deliver on capital, pay dividends, be able to share profit among stakeholders, maintain the market value, excel operational, efficiency and excel.

And all these are important, but they can’t be considered in isolation. They immediately would be constrained by expectations or requirements, be it external or internal. So we are talking about regulatory constraint, rating agency constraints, investors analysis constraint. So that’s another aspect. And there are different kind of, again, different frames. Later in risk appetite calibration bit, you will see how that actually is used to calibrate risk appetite.

Another thing is to understand competitive advantages that an insurance company has in the market to be able to manage efficiently any opportunity costs. And putting that all together into action would require some capabilities in management, being able to control, being able to model, apply different risk analysis and calibrate risk appetite, chart your risk taking path, knowing what risk to be transferred, what risk to be retained and so on. So that’s the important part of this moving puzzle.

Now we move on to HBSM framework. So we are going to introduce briefly, again that’s a very deep area for discussion, but we’ve got limited amount of time to go through that. So obviously, we’re going to be touching on really using high-level description of its principles and features.

So William, would you like to comment on the risk-reward balance and the balancing act, and I will continue after that?

William Gibbons:

Yeah, thanks Yuriy. Absolutely. So if we look at the left-hand side of this slide, so first point clearly value is created by taking insurance risk as Yuriy has described, including premium reserve and catastrophe risk. And clearly, it’s important to navigate the underwriting cycle well.

And then looking down at the asset side, so the first point to highlight is that taking investment risk can be a long-term contributor to return on equity. So one example of this, Swiss Re has a report out last year and they estimated that 100 basis points more of yields in terms of investment return was worth as much as 250 basis points on the combined ratio. The way they derived that was by looking at the volume of investments compared to the underwriting premium in each year. But that in itself is a striking figure. So it suggests that if interest rates just go up by 100 basis points and you’re getting 100 basis points more in terms of risk-free, then that has a direct translation into the profitability of insurers.

Clearly people who have been anticipating that interest rates would start to come down as inflation tails off, and they may ultimately do that and there are some gradual signs of that, but it’s taking time. And so from an investment return perspective that means this tailwind is continuing perhaps as a positive theme.

And then if we look down at the charts, and I appreciate the writing is very small, so I will endeavour to describe it to you. So this is a chart showing renewal rates, which is what those bars are, and also some market variables, so CPI and rolling returns on an investment portfolio. So if we take for example the purple bars, that’s showing renewal rates on property, and the blue bars are renewal rates on casualty. And then if we look at the really light blue line, which is probably very faint on your screens, that’s showing US CPI. So that’s the big spike we saw in inflation for example, you see it post 2020 or so. And then in dark blue, you’ve got the investment return on a portfolio linked to the Barclays Agg.

So I think the point here to make is that the renewal rates, that really pronounced peak that you still can see even though it’s a small chart, happens around 2019, that’s beginning, and then it’s kind of done by about 2021 and it’s starting to come down. I mean, rates are still high, but they’re starting to come down. And that is clearly before COVID, so nothing to do with COVID as best one could tell, and long before you see the peak in US CPI, which happened as we started to come out of the pandemic.

So that’s kind of one example. You can look at other parts of the chart as an example as well of how hardness and softness in the underwriting market doesn’t really seem to be very correlated with macroeconomic conditions. So that’s a positive because what it potentially means is that by taking investment risk at certain points in the cycle, or taking more underwriting risk at certain points in the cycle, you could potentially not only diversify your risks, but also position yourself optimally for the current set of conditions and make both the assets and the liabilities work for you at once.

So I think just to cover off other sources of return briefly, so another source of return that we do see is credit spreads. And here the point is versus holding Treasuries or UK government bonds for example, by holding credit you earn over the cycle, if you look at default rates and you compare them to long-run  spreads, you do earn an enhanced return for doing that. So there is a risk premium to be had from credit. And that again, if you think back to the 100 basis points of yields it’s worth 250 on combined ratio, then again, whatever additional pickup net of defaults and losses and so on, you get on your credit is also translating into a similarly substantial hopefully component of combined ratio equivalent.

So you’ve got equities as well as another asset class which have the potential for capital growth and various sort of alternatives as well.

So I guess the main point in summary is that the investment markets can be a diversified source of return, and depending on how you play them, they can really add value to an insurer and to overall returns over the cycle.

Yuriy Krvavych:

Right. So as I mentioned earlier, the key attributes of HBSM framework that we are going to discuss in today’s presentation, these are risk appetite and evaluation of strategies. Risk appetite, that’s simply, it’s that system of coordinates that insurers calibrate and try to understand within which they would operate and consider to be a norm to operate. So basically it’s all about knowing what good looks like and what the norm is for insurance company. Another thing, once that’s calibrated, then you have a proper measure, the yardstick to be used to evaluate strategies, deals and distinguish one from another, which one is adding value, which one is actually destroying value.

And these two attributes, they fit into the control cycle of active risk management. So risk appetite as a sat-nav system is used to chart the risk taking path. I mean it’s all about how the risks are taken and transformed, and then what do you do after that to manage them. And then as you deliver the value, whatever the performance is, that looks in the form of feedback to evaluation and risk performance analysis, and again used later in the next cycle of risk appetite renewal.

So now risk appetite more specifically, again in high level, so what that is, it is simply an important satellite navigation system for any insurance entity. It consists of a set of strategic risk levers. And here you could see in a grey box, so those strategic levers are used to control how risks are getting taken and pulled together, so hence underwriting mix lever, and how different risks are getting offloaded and with what instruments. Again, that’s the risk transfer and reinsurance lever. How the investment risk is managed, so what available funds are invested in what assets and in what composition. So that’s asset mix risk lever.

So all of those strategic levers, they have their own operable ranges and they are bounded from below and above because they are constraints, internal and external. They’re coming from different angles, starting from risk preferences of the board of insurance company, regulators, rating agencies, policyholders expectations, prevailing conditions in insurance market, and competitive ventures of insurance company in running certain business, writing certain businesses in the market and delivering value on it. And then also in financial markets, investors’ expectations, macroeconomic environment, they’re all kind of different frames on their own which are constraining the range of each strategic risk lever.

So the risk appetite is that important exercise that is done on at least yearly basis to determine what is the norm for three to five years in terms of what reinsurance to buy? Are we still okay to write certain types of business in a particular composition? Are we okay to invest in certain asset classes in certain composition as we did in past years? So is it still relevant? Do we need to change something? To answer those questions, that’s the exercise to go through which the main output of that exercise is to find or revalidate those optimal operable ranges of strategic risk levers by putting all the constraints, preferences and expectations together and considering them whilst trying to protect and maximise the enterprise franchise value. So that is the essence of risk appetite calibration.

This is just an illustration how risk appetite looks in reality once calibrated. So by no means I’m going to go through all of these kind of details, but the important bits are highlighted in blue. So here you see this different priorities in the top raw, you have protecting solvency, being resilient to financial distress, maintaining level and stability of earnings, excelling your operations.

And there are two forms of risk appetite expression and communications, first one is risk appetite statement, which actually is a mixture of qualitative and quantitative expressions which are taking into account, in the first place, they are elicited from the board, from various stakeholders of the company, and put in place and validated through modelling and applying risk intelligence. Once that is calibrated, that comes in the form of statements reiterating those preferences in a more formal fashion. And once that’s done, that is getting translated into something more tangible, what is called mandate, a system so to say, a system of thresholds and limits which are getting cascaded down to the trading floor and help operations to navigate within the boundaries set in the risk appetite.

So this is what risk appetite looks like and how it works in practise. By no means it’s a light kind of du jour exercise that people repeat every year, it’s a very iterative process to go through. It involves various stakeholders in the company. It’s very laborious exercise, I must say.

Again, the benefits of having risk appetite, there are many benefits, but one that I wanted to highlight here in this presentation is basically it helps to find that optimal sweet spot, the optimal operable range of economic capital. So what is right? Is that a solvency ratio of 140 or 160, or maybe 180 is right for the company? As we know, that varies from company to company. So what is the right operable range of economic capital for a particular insurance entity? So the risk appetite answers this question simply by looking into the cost of capital which varies with the strength of the company, with its capitalization, and looks into, that’s basically the expectation that the capital investors impose. And also they look into how much you could deliver to fund to meet those expectations.

And here you see the two forces, market forces, they meet halfway through. So the green line, this is how much policyholders are willing and able to provide through paying premiums. And the amber line, that’s basically the capital providers’ expectation, and that sweet spot is somewhere in between. And in that, you see that’s economic capital range, so people have a enough had room to manoeuvre and change a lot of things as they go to adapt to changing conditions in the environment. But also you could see different forms of capital, not just the economic capital, but also the rating capital, all that. So that actually defines that norm that companies are using when they are charting their risk staking path all the way to the value creation.

So now on the evaluation side, once risk capital is calibrated, it is used to evaluate different strategies, different deals here on the reinsurance side. So people put some value on a particular reinsurance options, is that to differentiate which option adds value, which option doesn’t add much value or destroys value. So the key thing here in an evaluation, it’s the evaluation that follows the principles of economic value added principles. So what it does, it employs the risk-adjusted return on capital, meaning that it applies variable rate of cost of capital to different tranches of risk, because different tranches of risk as it’s getting consumed would have different value to the company.

Unlike a different concept which many of ours are familiar with, it’s return on risk-adjusted capital, people often resort to allocate capital, which in the first place is defined as through one or two known risk measures like VaR, it’s a single point estimate in the tail of the risk profile, or TVaR taking that point and extending that to the tail and applying equal weights, probability weights to different scenarios beyond that particular VaR level.

So the, RAROC, risk-adjusted return on capital does that differently. It differentiates the cost of capital as you go to different risk tranches. What that means, that variable cost consists of two components. It’s a pure fixed occupancy rate, it’s similar to capital hotelling kind of principles. So the capital is there, the slice of it, if it’s not used, well there’s a charge occurred and it’s a fixed occupancy rate that is paid. Once it’s actually consumed, it’s getting too expensive, so there’s that consumption rate which is very, very high. It often comes in multiple of hundreds, whereas occupancy rate is the probability of staying in that position, of not triggering particular tranche, is quite high, but the rate is quite low.

So putting all these things together, that actually helps us to allocate the overall total risk-adjusted return on capital down to any slice of risk. And once it’s done, we know how the total risk load that is associated with the total risk adjusted return on capital is allocated to a particular risk tranche. And putting all these slices together, you could conform to a particular layer of interest that is considered to be offloaded or retained, or lines of business or parts of portfolio, whatever. But once puts together, one could calculate the economic value added, and that’s the principles that this analysis is following and it allows you to calculate. So knowing that what is required to be delivered for a particular tranche or through that top down allocation, and comparing that to what the actual funding is, that differential creates the EVA value. It could be negative, it could be positive.

Another thing to mention here is that that allocation, we talk about risk adjusted return on capital, it’s an object, it’s a quantum, but it’s quantified through another type of risk measure, which is called spectral risk measure, which basically associated with how risk is differentiated through different risks.

So I’m going to skip through a few slides in the interest of time. So this is how evaluation is done in reality. So the feasible set of solutions, deals and strategies would be identified, put through constraints, then shortlisted those constraints, risk appetite or external constraints. And then economic value, EVA analysis would be applied to calculate what value is added by each option, and then ranked appropriately.

So this slide illustrates how the ecosystem of risk management tools available that could be used to manage balance sheet insurance business appropriately. So here, as I mentioned earlier, all the instruments, risk management instruments are split into risk transfer and risk pulling. So be it on the pre-loss funding or post-loss funding, be it on a paid in or contingent basis, on the risk transfer side, traditional reinsurance or alternative risk transfers, all those things would need to be evaluated.

Now we’re going to go to some case studies to consider. We’ve got three, so I start with the reinsurance, the example of reinsurance evaluation. So simply how it works, so on the risk appetite, a certain kind of norm or the core reinsurance purchasing or minimum reinsurance purchasing would be defined. And the rest is the tactical play or opportunistic play, you add layer or you drop layer. And through that, we could look at the incremental effect by say a particular layer that we contemplate into either cede or retain. So when ceding, that risk would be transferred to the reinsurance balance sheet, would attract capital charge and the capital charge would be passed on through the reinsurance cost. So that’s one side view of risk once the cost of transferring.

And once that layer is retained, if that layer is retained, then on the insurance balance sheet side, that would attract additional amount of capital and which would need to be serviced. The cost of service in that incremental marginal capital would be compared to the cost of transfer. And that incremental creates the EVA value.

That EVA value could be calculated on the retained basis, as it is illustrated here in this example. We have a global insurer player which wants to evaluate reinsurance programme. So basically we help to evaluate reinsurance programme using RAROC and EVA analysis. So we’ve got the company’s profile with certain targets stipulated, constrained and stipulated by risk appetite, insolvency ratio, the target return on capital. And then what we did, we identified that minimum reinsurance cover that would be feasible, allowable, and one trigger any changes in risk appetite, and then incrementally add additional layer to this to arrive at the retained position of particular reinsurance options of interest.

So various options were tested and compared against the current reinsurance programme. And then on the table in the exhibit in the bottom right corner of this slide, you see the impact. So you see that the proposed reinsurance programme offers better expected EVA value than the current programme, and also offers a better prospect of having positive EVA.

Another example of using EVA analysis in evaluation is to evaluate the underwriting portfolio’s performance. So an insurer had a portfolio and basically typical task is to with all profiles and risk-capital constraints, we looked at the 11 lines of business and basically allocated the total risk-adjusted return on capital to those lines of business. They’re treated as a tranche of risk and the corresponding EVA values were calculated and ranked. So through this exhibit on the right-hand side of the slide, you see which lines of business are adding value, which lines of business are actually destroying the value.

And the next example, I pass on to William.

William Gibbons:

Thanks Yuriy. This is an example of an insurer which wanted to review both assets and liabilities in tandem, so it really was a strict balance sheet analysis. In terms of market risk, their SCR was highly concentrated in equity exposure. So they had an awful lot of market risk SCR, and as you can see there a very high allocation to equities. They wanted to maximise economic value added subject to constraints, so regulatory rating and investor constraints in this case, to reduce volatility and improve the overall risk-reward balance. They also sought to maintain a different asset mix, strategies for assets backing technical provisions and the shareholders fund. And from a capital perspective, consideration was given to improving the efficiency of the reinsurance programme. Diversification between different types of market risk and between market and underwriting risk are also considered.

So maybe moving to the next pillar. So I guess we looked at both sides of the balance sheet. We thought particularly about in terms of investment strategy at the SAA, and we considered that as well as derivative strategies to mitigate downside risk. From a non-life perspective, catastrophe risk was as a key driver of SCR volatility. We supported the evaluation of a reinsurance programme.

And then moving on in terms of outcome, the third pillar, thank you. So in terms of outcome, the analysis suggested a rebalancing of assets held against technical provisions to 100% fixed income and the immunisation of interest rate risk. So the shareholders fund could continue to hold some equities. And in terms of non-fixed income asset classes, I suppose the allocation to equities was clearly reduced. And the net result of all of this was to increase risk-adjusted expected return. And from a non-life perspective, SCR event risk was addressed by adjusting the reinsurance programme, which should improve the overall solvency position.

So I guess the point here is that by looking at both sides of the balance sheet together, a superior outcome is achieved for the insurer.

Yuriy Krvavych:

So to wrap up, I mean we’ve introduced HBSM as a powerful framework for managing risk and achieving value creation in the insurance industry. So unlike any other kind of concepts of balance sheet, traditional ones of balance sheet management, this one takes a holistic view, considers the balance sheet as an interconnected whole. It helps insurance navigate that delicate balancing act of risk taking, risk transformation through transfer and risk funding, and also risk control. And obviously we discussed the two main attributes, so it’s risk appetite, the calibration of that satellite navigation system for insurance company and using it to evaluate strategies and deals.

So another thing to finish that with is that HBSM also enables innovation, because in a way any risk management is innovation, but it’s a specific one because it’s effective in a way that actually it provides a complete answer if you like. And also innovation, it helps companies to get to the next level. So if something goes down because they’re getting used to particular process and things, that’s the thing that challenges the current course of risk-taking, of risk management, and brings them to the next level. So that’s the key message here.

And I think a little bit about who we are, what we do at GC and Mercer. So we work together on different initiatives on HBSM, helping clients to look at different sides of the balance sheet, what goes into it, what risk stick to the balance sheet, what to with them, what solutions are right for them. So that means generally we could start a conversation with the client about their risk performance and help them to do that analysis, or more kind of strategically just looking into their risk appetite. Often people have risk appetite, but it’s not that effective or functional because it hasn’t been challenged properly or calibrated or maintained properly, so we help them with that.

We help to design and evaluate strategies in particular in the reinsurance space. And when it comes to risk and capital modelling, these are the services we also provide, providing educational workshops to C-suite. So that’s what we do and many other things. So if you interested, please reach out to us and we will have more meaningful conversation. Thank you.

William Gibbons:

So we’ve had a couple of questions come in. I think if people want to ask further questions, please feel free to submit those via the chat function. So the first one of those is how can HBSM help better integrate investment risk management with investment strategy to meet long-term member goals? So maybe I’ll have a quick crack at that. It’d be good to get your thoughts too, Yuriy.

I think the key point here is that investment risk does appear to diversify against the risk of underwriting. And also that the two cycles, the underwriting cycle and the investment cycle are quite different. So if you look for example, just taking today and the conditions you’ll see around the election, there are challenges for investment markets. Does it mean that it necessarily impacts underwriting and renewal rates somewhat directly? That’s an interesting question, but perhaps not necessarily. But anyway, the point there is that by taking different sources of risk at different times, you could potentially achieve a better overall outcome through the cycle, would be my thoughts.

But Yuriy, anything to add?

Yuriy Krvavych:

Yeah, I would add, I mean more kind of building analogy when it comes to controlling systems, and any insurance business, it’s a system to be controlled, managed. So having one kind of lever to pull, you would question is that the efficient way of navigating and controlling that system? Or using multiple levers, controls at the same time and vary them and see what is my sweet spot? That could be a complete different answer. I mean it could be just looking at reinsurance, because immediately it could imply that well the problem is due to not enough buying reinsurance or buying the wrong reinsurance. So one way of dealing with that particular issue is just dealing with one lever as a reinsurance.

And I could speak on behalf of that because I’m part of the reinsurance broking house, but we often advise clients to take a bit wider view, more kind of a bigger picture. So yes, it’s reinsurance, but must be something else into it. It’s underwriting discipline and how the risks are taken on board, the pricing, reserving, other things that matter. And also what’s an investment side? Are their peers, they better manage their bottom line of their P&L because they built and developed their own natural hedges through either investment or reserving or both? Again, the HBSM brings the toolset that helps to navigate with multiple risk levers.

William Gibbons:

Great. And so we had one, well, two other questions actually. So one of them was some of the common challenges you’ve seen mutuals face when implementing HBSM, how can we avoid them? So I think maybe one thing I’ll say, and Yuriy, it’d be good to get your thoughts too, so definitely you can see challenges whereby people are insufficiently joined up between assets and liabilities. So where they think about the investment portfolio is one thing and they think about the underwriting as something else, with different individuals responsible and then you kind of pull them together at the end. I think being genuinely integrated across the two is a challenge.

And also sometimes people think about, I think coming from the investment side is a slight danger, people don’t think enough about the investments within an insurer, because you have got the two halves to play with. And so just think, well, you can invest in a very standard way and you don’t need to think too hard and all the focus is on the underwriting. That’s probably where things are being balanced.

But I don’t know if there’s anything else?

Yuriy Krvavych:

I think one thing I would add to this is that yes, you’re right William, you said that when it comes to dealing with different risk in a system of risk within the insurance business, yes, insurance risk is the main one because that is associated with the core business, the very core business because insurers create value by deliberately taking risks and insurance risks. But by doing that, inevitably they’re getting exposed to market risk, that needs to be managed as well.

So again, whilst understanding that, often insurers, they think that, well that’s the first thing, when it comes to risk appetite certainly, well insurance risk comes first. Obviously in the way it’s structured, the thresholds and limits, it’s different structuring, different kind of levelling. But on the asset side, could be more on the passive side as the rest comes after that, whilst taking say more credits, credit spread, it could be beneficial for a particular year because prevailing conditions in the market, they’re dictating that. If people don’t think holistically and are not taking that bit on board, it’s an opportunity cost for them.

William Gibbons:

Yeah, no, indeed. And then there’s another one, I might direct this first to you Yuriy as I’ve answered the first two first myself and then passed it to you. So we’ve seen investment reinsurance, risk underwriting and capital management teams work more closely with insurers following Solvency II and its emphasis on holistic risks. So would you say people are working together more closely post Solvency II?

Yuriy Krvavych:

Yes.

William Gibbons:

It’s a long time ago now.

Yuriy Krvavych:

Yes, ’16. I think the quick answer, yes, but I think there’s a lot of room for improvement, because I don’t feel like the business community post Solvency II, we’re already what, eight years into it, and it’s a long way to go to embrace all the power of risk intelligence, modelling capabilities, understanding risk, translating that into something that could be managed effectively and the margin could be squeezed and the value could be delivered. So I think still there’s a journey to travel to become a fully aware that, I mean, yes, the rank requirements, they are important, but it’s not just about them and it’s not about entertaining the regulator, it’s for the business in the first place. And then of course, by taking into account there’s the very same frames and constraints imposed by regulators and other kind of external stakeholders.

So I think yes, but more improvement would be required in that regard.

William Gibbons:

And that’s maybe not a bad note to finish on as we’re up on time now. So I think probably remains for us to say thank you to ICMIF for having us. I don’t know if you have any closing remarks folks?

Mike Ashurst:

Thank you very much to Yuriy and to William for sharing your expertise with us today. This is a very important and relevant topic of HBSM. Thank you to everyone for joining us. Just to remind you, the recording of this webinar will be available to you afterwards. And recordings and transcriptions of all past webinars are available on our website and I’ve posted in the chat to the link to that webpage. So thanks again everyone and look forward to seeing you at the next webinar. Thank you.