How ILS can assist in your product approval process

In a nutshell 

Our client wanted to launch several new products. As part of the product approval process, the products needed to comply with a number of requirements to ensure they were within the market risk appetite. We supported management by identifying the requirements, documenting their compliance status and implementing actions to help progress the approval process.

How we did it 

By collaborating with various functions within the insurer, including Corporate Actuarial, Risk, Product Development and Balance Sheet Management, we produced a list of requirements that would be needed to satisfy decision-makers that the expected level of market risk introduced by the new products was acceptable. These requirements included:

• Developing a risk limit for the division and assessing whether the total exposure after introducing the new products would be within the limit.
• Ensuring adequate risk management and monitoring measures were in place to limit potential downside of the risks introduced.
• Pricing the new products using a risk-based cost of capital approach to check whether shareholders would be compensated adequately for the risk taken on.

Developing risk limts

We applied a bottom-up approach to determine an appropriate risk limit. We obtained the market risk exposures of the in-force products, which had already been determined in-house. We then estimated the expected exposure of the new products given a 1-in-10 market risk shock (in line with the guidelines set out by the Risk Function). After adding a margin to account for uncertainty, the proposed limits were presented to the Executive Committee for approval.

Ensuring adequate risk management and monitoring measures were in place

Having been provided with the client’s market risk policy and framework, we engaged with the various teams responsible for launching and maintaining the products. We documented the extent to which they were meeting the policy requirements. We also documented the governance processes and the market risk breach protocol to ensure that the required structures existed to keep market risk within appetite.

Pricing on a risk-based capital basis

Pricing for the new products had been done on a basis that was not considered risk-based, contrary to what was required in the product approval process. We modified the existing pricing models to include return and capital calculations on a SAM basis so that pricing could be determined using a SAM cost of capital (which was agreed to be a risk-based measure). After that, we calculated the SAM-based return on capital and internal rate of return to compare against internal return hurdles. This would allow decision-makers to assess whether shareholders were expected to be compensated adequately for the risk introduced by the new products.

The outcome 

By implementing these (and other) actions and documenting them clearly, Insight was able to provide the decision-makers with the information they needed to determine whether the market risk element of the new products met the requirements of the product approval process.

Benefits of outsourcing product approval and risk management work to Insight

• We can create capacity in your team by taking on ad hoc projects (such as product approvals) and allowing you to get on with your BAU work.
• We bring risk management, pricing and capital modelling expertise that can augment work done by your team.
• As independent consultants, we can help achieve consensus among various organisational functions with conflicting priorities and views.
• We are well-versed in many actuarial programming languages and, as such, would be able to work with and enhance any existing models you might have.
• We can hand over the models we build to you, empowering teams to repeat exercises in future.