Expert: Local insurers in the dark over ICAR
The Star, Tuesday February 12, 2008, KUALA LUMPUR: Many insurers face difficulties in determining the internal capital adequacy ratio (ICAR) required under the risk-based capital framework (RBC).
This is due to a lack of understanding in enterprise risk management (ERM) and building a risk cum capital management model, said Institute of Internal Auditors Malaysia former president Vijayam Nadarajah.
Vijayam, who is now a finance head of a general insurer, said: “The evaluation criteria of enterprise risk is unclear to many insurers and they are looking for some guide on identification, assessment and particularly on quantification of qualitative issues and the eventual contribution to the determination of ICAR.
“Although the foreign insurers may be able meet the deadline for the RBC framework by Jan 1, many local insurers may not as they are unclear on the process of developing the risk cum capital management models, and in addition, do not have a prescription to adopt.”
ICAR is the capital required by a company to meet premium and claims liabilities and risks such as credit, market, operational and interest rate risks, among others.
Insurance companies need to be RBC compliant next year. The framework requires an insurer to maintain an ICAR that commensurates with its risk profile.
Vijayam said insurers were faced with the challenge of depending on enterprise risks in arriving at and determining the ICAR.
Insurers, therefore, had to aggressively prepare some risk models by learning from other global solvency regimes, she told StarBiz at the recent Financial Resilience of Insurers conference.
At the same time, solvency regimes elsewhere were also consolidating their experiences and putting their act together to ensure success in implementing at some future date, she added.
“Some of the other problems in determining this ratio include computing economic capital, economic reinsurance protection management and capital injection and exiting as these measures focus on real earnings, profitability and real returns on capital,'' Vijayam said.
ERM is a systematic and disciplined approach to managing risk throughout an organisation. It enables the organisation to assess risk and identify the steps it can take and resources it should allocate to overcome or mitigate risk.
Based on this understanding, stress testing the capital adequacy on likely scenarios and sensitivities could be performed to ensure the determination of ICAR would be more meaningful, Vijayam noted.
According to Vijayam, running the relevant statistics for ICAR was made worse in view of the current market volatility.
A sound ERM system would help better manage an insurer's business to ensure better financial results and overall preparedness for a new solvency regime, she said.
ERM, she added, was the foundation of prudent corporate governance and assisted insurance companies in making better informed decisions and hence improve underwriting profits.
Source from: The Star, URL: