Risk management in the Maltese general insurance sector : an empitical study of selected local insurers

Abstract

The insurance industry contributes to economic growth and national prosperity in numerous ways. By facilitating risk transfer, it helps strengthen the efficiency and resilience of the economy at macro level. At the micro level, it introduces benefits in all areas of ordinary life, enabling individuals to minimise the financial impact of unexpected future events. The insurance industry responds to the exigencies of consumers, availability of re-insurance and the changing economic and political scenario. Still, the basic fundamentals of correct pricing, adequate reserving, effective liquidity management, and Balance Sheet strength, remain unchanged through time. Until recently, insurers viewed Risk Management (RM) as a regulatory requirement, failing to grasp the benefits that a formalised RM exercise could potentially generate. Nonetheless, the shift to a highly-competitive and riskfocused market forced insurers to revisit RM thoughts, making it an irreversible trend. The exposure to risks and failures experienced over the years, led to regulators becoming sensitive to the need for action, feeling that they had to identify the causes of failures in the sector and work towards finding the right solutions, in turn initiating the development of the Solvency II regime. Controlled risk-taking requires strong, comprehensive and independent RM processes to identify, assess, and control exposures. Proactive Enterprise Risk Management (ERM) leads to the implementation of a more rigorous product approval process, enhanced risk monitoring and stress testing, and the flexibility to benefit from attractive business opportunities. The local insurance market is striving to improve its RM practices, whilst keeping abreast with Solvency II developments and showing commitment towards enhancing risk knowledge. Critical local challenges and weaknesses revolve around the lack of actuarial resources, the need for more formalised risk documentation and risk reporting, the establishment of RM Committees as independent bodies, and the need to address operational risks, attempting to quantify them. These advancements, together with the level of preparedness of the local regulator, will ultimately determine whether local players will benefit or otherwise from the new Solvency II regime. Even though the need for formalised RM systems was always felt by insurers, this need was accentuated by 2008 concerns, including the hardening re-insurance (RI) market, the financial crisis, government bail outs, capital constraints, rating agencies' credibility, profits sustainability, revised profitability forecasts, and capital market volatility. The use of insurance to hedge financial and non-financial risks is expected to rise as risk appetite falls. The majority of local insurers are reluctant to withdraw foreign investments due to concentration risk and due to their conviction that the financial crisis will eventually hit Malta. Thus, overseas investments may be safer, providing a broader investments' spread. Others are unwilling to withdraw local investments and venture overseas, fearing public perception. Nonetheless, insurers are constantly monitoring the market, ready to purchase investments at the right time and at lower prices should they foresee any upturns. Those responding to emerging trends and having flexible liability arrangements and strong Balance Sheet fundamentals, apart from capitalising on business opportunities, are likely to be the winners. However, players being highly exposed to credit and counterparty risks will lose out.