ICAAP – Lessons Learned

On Wednesday this week (22 April), I am part of a panel discussion on ICAAP – comparing and contrasting the experience across the banking, life and general insurance industries. I’m representing life insurance. This post summarises the points from my introduction. I’ll come back and update with any interesting points from the panel discussion.

Challenges in implementation

Life insurers had to introduce ICAAP from 1 January 2013, which meant we had to have an approved ICAAP summary statement by that date, and generally produced the first ICAAP report within 12 months of that date (largely in respect of year end). As part of implementation, there were a few challenges for many insurers:

• Who should run it – should it be risk, actuarial, finance, treasury or some combination?
• What should be the date of the report – should it be the year-end date, which adds to the workload at a very busy time of year, or the business plan date, to reflect the focus on the three-year projections?
• What are the gaps that come out of the required focus on capital and risk management? For most life insurers I’ve talked to, more rigorous stress and scenario testing and using capital as a key lever to manage the business were the areas that required development
• Independent review – what does “operationally independent” mean, and how should existing reviews of various aspects of capital and risk management be leveraged?
• FCR vs ICAAP report – how should these two reports relate to each other?
• Should be at company level only, or include other parts of the Group? – this is a particular issue for life insurers, who are very frequently part of a Wealth group that includes non APRA regulated entities. If risk and capital management occur across the regulated and non regulated entities, should the ICAAP Summary statement and Report be written that way? And how much extra work does that entail compared with just doing a legal entity only approach?

Role of the Appointed Actuary

I’ve written a lot on the role of the Appointed Actuary in the new regulatory framework. It’s tricky to know what it is, when the ICAAP framework is the same across banks, and both types of insurers, but only Life and General insurers have an Appointed Actuary.

A recent Actuaries Institute task force came up with a positive definition of the role of the Appointed Actuary:

The purpose of the role of the Appointed Actuary is to ensure that Board and senior management of a life insurer has ready access to, and make appropriate use of, professional  actuarial advice with respect to the key financial management aspects of the life insurer.

Since the ICAAP is all about key financial management aspects of a regulated entity, the Appointed Actuary obviously has  an important role to play. In most companies, certainly my own, the Appointed Actuary and the actuarial team are a key part of ICAAP – both the capital management inherent in ICAAP and also a key link between finance and risk in translating risk to capital and back again.

Most Appointed Actuaries, if not managing the ICAAP process, are providing the quantitative resource, as well as being the translator and general glue between the other key parties involved in capital and risk management (such as second line risk, treasury and finance).

Relationship with Financial Condition Report

I wrote a post a couple of years ago about the role of the Appointed Actuary in the new regulatory framework that ICAAP is a part of. One of the big questions that comes out of that is about the relationship between the Financial Condition Report and the ICAAP Report.

The documents have large overlap, but each includes items which the other is not required to include. Looking at the detail of the requirements of both, adding a few extra aspects reporting on the linkages between the risk profile and capital of a company would be likely to improve an FCR, and enable the ICAAP report to be built substantially from the FCR.

Talking to other life insurance actuaries, most have tried to leverage the two documents as much as possible, but have found that the nature of the authors and the separate requirements of the two reports means that even sections that start out exactly the same often end up being rewritten for one or other of the reports.

Any Board and senior management would rather spend their quality time absorbing one, rather than two documents. So one document (it could be either one) ends up being the key one, the other more of a compliance document.

Value of the ICAAP

From my perspective, there are two main value adds from the ICAAP:

• the push to think about risk management and capital management together – which helps people inside an insurer understand the relativities of the different financial and non financial risks
• the opportunity (or even requirement) for all of those who deal with risk management and capital management to work together towards a common goal. In my own company, we created an ICAAP steering group, with relevant involvement from Risk, Treasury, Actuarial and Finance, that enabled us to keep track of all the various pieces of work that were being done that could impact the ICAAP.

So as an addition to the risk management toolkit of a life insurer, it has been worthwhile.