For Stephen Sonlin, Managing Director and Head of Risk and Capital Management Solutions at Conning, his field of expertise is now a growing focus for the insurance industry and this has been keeping him quite busy. “Overall, risk management is becoming increasingly important because of what’s going on in the industry, on both sides of the balance sheet.

 “There’s a lot happening in the area of risk management on the regulatory as well as the ratings agency front. This is causing a lot of insurance companies to explore what needs to be done to comply with these emerging directives.”

Globally, insurance companies have their eyes on Solvency II and the factors within its framework, Sonlin says. “What is certain is that there is a need for internal risk models and a greater understanding of the unique needs of individual insurance companies.”

“How these models should be set up, the types of risks that can be incorporated in them, how the risks should be thought about and parameterised are still open questions and companies are struggling with them, which is creating delays in the implementation of Solvency II.”

Increasingly, companies are putting risk management systems in place so that they can better operate their own businesses using internal risk management frameworks to satisfy regulatory compliance, Sonlin says. “For a lot of companies, the risk is more than just what happens in extreme scenarios, it’s what happens in the more central part of the risk distributions.”

“Risk has always been at the forefront of the insurance industry and most companies actually have a good handle on their various risk exposures but they still tend to look at risk in individual segments. They will look at investment risk and underwriting risk separately; everything is done independently and often in different areas of the company.”

Technological advances over the past decade have helped insurance companies to now look at risk holistically, he adds. “This enables us to look at risk across all aspects of a company rather than just one aspect.”

Asia is also seeing a lot of emerging developments in terms of risk management, Sonlin says. In China, for example, regulators are starting to expand investment options for insurance companies and the easing of such regulations may expose the industry to more risks. “This increases the need to understand and manage those risks so that when you take advantage of those loosening requirements you’re not exposing the company to additional risk capital that may be detrimental. We’re seeing more of that as companies are gaining access to more investment choices and experiencing more risks.”

Risk management in general is very similar globally, he adds. “You have risk on the assets side, you have risk on the liabilities side. The risk elements, no matter what part of the world that you are in, tend to be the same. You have asset-liability mismatch risk, liquidity risk, extreme tail-risk, and emerging market risk that you need to consider. So from that perspective, risk management is very similar no matter what part of the world you are in.”

However, countries are at different stages when it comes to regulating these risks Sonlin says. Asia is certainly lagging in its approach to risk management compared to Europe. “It’s a real interesting time and there are a lot of risks that need to be monitored and controlled. Every year, it seems, the industry is experiencing a one-in-500-year risk event.”

Being prepared and thinking through what’s going on becomes critical, Sonlin adds. “What we’re trying not to do in risk management is predictive work. We’re not trying to say this is going to happen and here’s how you can avoid risks. What we’re trying to do in risk modeling is to say we’re not sure what’s going to happen, but we know that there is a wide range of things that can actually happen.”

“We want to make sure that companies are thinking about how to behave well under all the potential scenarios, whether it’s in their investment strategies or their liability business planning.”

Financial models are useful to help companies think about different kinds of scenarios, Sonlin says. “Risk management is all about projecting your strategies under a bunch of what-if scenarios. So it takes a little bit of thinking about the what-ifs that can occur and you need to be prepared for any of them.”

“This type of exercise can help companies think through how they want to put their various risk elements together to minimise the capital requirement and maximise their returns on capital.”