The versatile proportionate risk assessment tool developed by The International Actuarial Association 

For effective risk-based financial management and supervision, individuals and organisations need to identify the key risks before they can be managed or supervised. To assist with this in areas where actuarial skills are limited, a practical risk assessment tool has been developed by the International Actuarial Association (IAA)’s Inclusive Insurance (previously Microinsurance) Working Group.  This tool gives a framework to assess risks and their impact on an organisation. The process provides supervisory and decision-making insights for a wide range of applications.  

Variety of applications for tool 

The versatility of the tool is evident in its ability to provide insights on the risks arising from a range of activities including: 

• Product approval process (for both regulator and insurers) 
• Assessing the risk arising from the privatisation of third–party motor insurance 
• Understanding the risks arising from large cross-cutting risks like COVID-19 

The IAA ran a webinar mini-series on risk-based financial management and supervision that showed how the proportionate risk tool works and showcased two applications. The first example demonstrates how the tool has been used to transform a supervisor’s product approval process by providing more clarity to insurers that want to launch new products in the market. The second example shows how the tool was used to highlight the risks arising when third–party motor insurance was privatised to enable targeted regulation to address these risks. 

The PowerPoint presentations are available in English, French and Spanish and the recording is available on YouTube. 

Impact of COVID-19 in Uganda 

The IAA tool was used to assess how COVID-19 changed the risks insurers in the Ugandan insurance market were facing. The Insurance Regulatory Authority of Uganda (IRA) and Ugandan insurers had received training on the tool, making Rwanda a natural choice for this assessment. The exercise aimed to (i) to test the ability of the tool to consider the impact of cross-cutting risks and (ii) to identify the broader impact of COVID-19 on the insurance sector in Uganda. 

Key learnings 

The tool was able to assess the risks from COVID-19, enabling the regulator to plan more targeted supervision. The exercise successfully highlighted the risks associated with COVID-19 and areas for regulatory intervention. This paves the way for the assessment of similar cross-cutting risks, such as natural disasters, by utilising the tool. The differing risk experiences of the insurers emphasised the need for risk-based supervision that considers individual insurers’ standing.  

The assessment also emphasised the importance of undertaking risk assessments on an ongoing basis. To consider the impact of COVID-19, the tool was applied to assess i) the risks insurers faced before COVID-19, ii) the risks insurers faced as a result of COVID-19 and iii) the anticipated risks one year into the future. The results show the significant changes in the risks insurers are exposed to between these periods. Thus, to accurately manage risks they need to be regularly assessed.  

COVID-19 forced insurers to digitalise their processes – temporarily disrupting business – but should benefit them in the longer term. The unanticipated shift to more digital processes increased risks in the short run. However, risks are expected to decrease in the longer-term, as the initial upheaval recedes, and staff and customers become more comfortable with digital processes. 

The risks insurers have been exposed to as a result of COVID-19 are expected to persist in the coming year. This increase in risk is primarily due to the slowed economic performance, which reduces clients’ ability to afford insurance. While total premiums received by the industry have shown growth, many product classes have shown reductions in premiums. The assessment results also show that insurers expected incomes to remain below budgeted levels for the year ahead. 

Continued risks from COVID-19 may place industry under pressure to consolidate. Some insurers were already under pressure pre-COVID-19, with combined ratios of over 100%. Increased risks suggest that consolidation within the insurance sector may be in the offing. The impact on the sector depends on how these risks are managed, emphasising the need for effective risk management. 

For more information, please contact  Nigel Bowman or Jeremy Gray.