In the second video in the Holistic Balance Sheet Management series, Andrew Cox, Capital Optimization, Guy Carpenter and Niall Clifford, Financial Strategy Group, Mercer, explore how companies should approach investment risk and the link between investment strategy, risk appetite and reinsurance strategy. A key focus for insurance companies should be to link their investment strategy with their risk appetite metrics. While any increase in return on capital may seem very attractive, it is important that companies ensure that the risks they are taking are in line with their risk appetite and that they are aware of their constraints, allowing them to take risks in a measured way. Investment strategy should be considered alongside regulatory requirements, as a key aspect of Solvency II relates to how well each company understands the risks in its portfolio.
Capital requirements are also a fundamental issue. Companies using an internal model need to ensure that their capital calculations are appropriate and accurately cover all areas of risk they are exposed to. Reinsurance can be used as an investment tool along with having in place a robust risk management framework within the organization. This will ensure that insurers are able to measure, manage and identify their risks and provide the tools to report on them – an important factor in fulfilling the reporting requirements under Pillar 3 of Solvency II.
Linking Risk Appetite to Strategy
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