Download PDF - Hiscox

Risk management
The risk management framework extends
to all aspects of risk including insurance,
market, credit, operational, liquidity,
environmental, ethical and strategic risks.
The core business of Hiscox is dealing
with risk. The understanding of risk is
intrinsic to every level of decision-making
in the Group.
The risks associated with the core business
represent some of the greater exposures,
however the Group is exposed to a number
of other risks and has systems and procedures
to identify and manage them. These procedures
are regularly reviewed and improved in the
light of the changing risk environment and
best practices. Risk appetite is set by the main
Board and cascaded down into the Group’s
global operations as part of the business
planning cycle and through various risk
and operational committees. These are:
Risk Committees
Underwriting Review Group
Reinsurance Purchase Review Group
Reinsurance Security Committee
Cash Flow Review Group
Broker Credit Committee
Investment Committee
Reserving Committees
Business Continuity Committee.
These committees are all chaired by either
the Chief Executive, Chief Financial Officer
or Chief Underwriting Officer and have specific
areas of focus, such as underwriting,
reinsurance purchase and security, liquidity,
broker credit risk, investments, claims reserving
and business continuity. Senior management
responsibilities are clearly defined together
with their reporting lines and the execution of
delegated responsibilities is closely monitored
by reporting to the Board and its committees.
This monitoring, supported by financial and
non-financial management information,
assesses performance against agreed targets
and objectives, as well as the risks to achieving
these objectives and the effectiveness of
the measures in place to manage these risks.
In parallel with these direct risk management
processes, there is a dedicated risk management
function which, in conjunction with Internal
Audit and the Group risk committees, monitors
and reviews the effectiveness of risk management
activities throughout the organisation and
reports to the Board. These functions are
organised centrally to assist in the integration
of best practice throughout the Group. A range
of risk management tools is used to assess
and manage risk both at business unit level
and on a Group-wide basis.
Major risks
The major risks that the Group faces are
presented below. Detailed information on the
major risks and uncertainties impacting the
Group’s financial statements is set out in
note 3 to the financial statements.
Insurance
Catastrophe and systemic insurance losses
The Group continues to underwrite significant
risks in geographical regions that are prone to
natural peril. This business remains a compelling
proposition for the Group since it is capable
of returning good margins over the medium
to long-term as the occurrence of catastrophes
averages out. As with similar insurers, the
Group’s earnings are affected by unpredictable
external events such as natural and other
catastrophes, legal developments, social and
economic change and the emergence of latent
risks. Such events can create significant levels
of underwriting losses. The Group manages
its exposure to these risks through having
a clearly defined risk appetite which dictates
the business plan and is realised through
disciplined underwriting, close and continuous
monitoring of exposures and aggregations,
and a prudent and disciplined reinsurance
purchase programme to cap losses from
risk concentrations.
Of critical importance is the quality of our
underwriting models and risk aggregation
capability. Incentives ensure that underwriting
staff make sound and objective judgements
that are aligned with the Group’s overall strategic
objectives and risk appetite. Clear authority
limits are also in place that are regularly
reviewed and monitored. Policy wordings
are reviewed regularly by specialists and legal
experts in the light of legal developments to
ensure that the Group’s exposure is restricted,
as far as possible, to those risks identified
at the time of policy issuance. The modelling
and monitoring tools are used both in the
underwriting process and by independent risk
specialists. They are used to design the insurance
and reinsurance programmes and control the
business underwritten to ensure that the risk
profiles of contracts match the exposures
for which the programmes were devised.
Incentives ensure
that underwriting
staff make sound
and objective
judgements that
are aligned with
the Group’s
overall strategic
objectives.
Risk management Hiscox Ltd Report and Accounts 2009
21