KN Group Insurance: Risk Management Strategy and Analysis

This report, prepared for KN Group Insurance Plc, addresses critical risk management challenges following the acquisition of smaller insurance companies. As the newly appointed head of risk management, the author conducts a comprehensive review, highlighting concerns in risk management systems, risk culture, risk appetite, solvency capital management, claims reserving, product quality, and reporting. The report emphasizes the need to implement a robust risk framework, build risk appetite awareness, integrate risk culture, and ensure solvency capital management compliance. It analyzes key risk issues, including corporate risk management and the adoption of a hybrid approach for information gathering. The report also delves into risk appetite, its linkage with strategic planning, and the integration of risk culture through high tone, communication, responsiveness, and commitment. The report concludes with a discussion on capital management, emphasizing the importance of accurate reporting and compliance with regulatory requirements.

992 Course Work Assignment
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Word count: 3,202
One approach of expanding your business operations is via exercising a mergers and
acquisition strategy. This strategy helps spur growth and also allows an organization to expand
geographically because the organization does not have to set up a new organization in a new
regime. There are multiple challenges in following a mergers and acquisition strategy which
includes and not limited to operational risk, underwriting & liquidity risk, compliance, tax regime
etc. which needs to be addressed appropriately.
KN group has recently achieved rapid growth through the acquisitions of smaller insurance
companies (outside U.K) and Higher management recently appointed me as a head of risk
management at KN insurance group Plc (KN Group) so a comprehensive review has conducted
after the acquisition, the following areas of concern were highlighted after conducting an in-
depth audit.
 Risk management systems and processes
 Risk culture
 Risk appetite
 Solvency capital management
 Claims reserving practice
 Quality and range of products and services offered
 Reporting and compilation of risks between companies and departments of each
company.
KN group need to address these concerns and create a strategy of addressing different
elements, we will also examine the possible impact of key prevailing issues, possible solutions
and devising strategies.
Prevailing Risks across the KN Group
Being a head of risk management, we must urgently pay attention to the following areas within
KN Group in order to improvise and maintain sustainable growth in the future.
1. Implementation of the Risk Framework within newly acquired companies
2. Build risk appetite awareness amongst stakeholder.
3. Integrate risk culture in all areas
4. Determine whether the solvency requirements of various regulatory agencies are met
(Capital Management)
Management of Risks
Risk management is an essential business strategy that helps companies to discover, analyze,
monitor, and enhance the business environment and risk mitigation process.
Consider the statement by Direct Line Group Plc Annual report 2019 mentioned in Mark
Butterworth Book (“Risk Management in Insurance”)
“Our management team, with oversight from the Board, and the Board Risk Committee, are
responsible for developing our strategy. Our Strategic Planning Process aims to ensure we
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have developed clear objectives and targets, and identified the actions needed to deliver them,
including the management of risk”.
As a Risk Head my primary responsibility is to examine organization’s business processes and
monitor external variables that affect the organization in some way or other as companies that
can foresee danger always gain the advantage.
Risk Appetite
European Insurance and Occupational Pension Authority (EIOPA) (2013) explained in the
guideline on system governance (Page 8/21) regarding the effectiveness of Risk Management
as… “In accordance with Article 44 of Solvency II Directive, national competent authorities
should ensure that the administrative, management or supervisory body of the undertaking is
ultimately responsible for ensuring the effectiveness of the risk management system, setting the
undertaking’s risk appetite and overall risk tolerance limits as well as approving the main risk
management strategies and policies”
Taking into account the following statement of EIOPA, risk appetite is the amount of risk that KN
Group is willing to take in order to achieve its strategic goals. Therefore, we must pursue a
certain risk policy, including risk appetite statement and tolerance level. Within this range, each
department; It can be followed in all aspects.
Risk Culture
Risk culture is the way that policy makers (at all levels within KN Group) consider and take risks.
Risk culture is very much associated with the risk appetites when it has been thoroughly
accepted and understood, all workers (somehow) are aware of risks in their day-to-day
decisions making, supporting or undermining the longer-term success of the organization.
Richard Anderson Chairman the Institute of Risk Management enlighten the Risk Culture as
“Problems with risk culture are often blamed for organisational difficulties but, until now, there
was very little practical advice around on what to do about it”
Organizations with weak or immature risk culture; the accountability of risk management
becomes unclear due to the absence of board oversight and direction thus KN group requires a
thorough vision and clarity from the top management which will play a pivotal role to curtail the
lack of knowledge of risks among workers and risk surveillance.
Solvency Capital Management
Life and non-life (both) insurance businesses confront various, time-consuming hazards and
need to buffer the capital against these risks. In order to discover means of managing their risk,
and the associated requirements for capital and optimize their solvency balances, KN group
needs EU-to comply with capital adequacy requirements also monitor other regulatory agencies
outside the EU in regard to newly acquired companies.
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Analysis & Management of Key Risk Issues:
Corporate Risk Management
Enterprise risk management (ERM) is a governance area dealing with operational,
environmental, financial, regulatory, market and other risks which may affect Insurers
perspective and planning.
However, if we look at the (article) London School of Economics/University of Plymouth
research project (part funded by the CII) on Understanding Corporate Risk Culture in Insurance
(May 2013) (based on the surveys) depicts the motives for risk management activities as
“It would seem that even risk managers view risk management as a hygiene activity, one to
help deal with negative outcomes, or one that is ‘forced’ upon the organization by regulators;
the proactive management of risk in order to create potentially profitable opportunities is seen
as a secondary concern”
KN group tend to utilize enterprise risk management process to streamline risk information
system between KN group and other newly acquired companies with a provision of well define
Risk Policy (Major component of ERM Process) containing the use of other mechanism to
manage the risk such as Audit, Maintain and follow Risk Register, allocation of specific Job
Responsibilities, Provision of Risk Framework, Risk Appetite.
These guidelines will help KN Group to share a platform where all companies can exchange
information by following different Approaches;
 Centralize
 Decentralized and
 Hybrid Approach
These approaches will benefit for registration information and future suggestions however every
approach has pros and cons, so we will discuss what approach KN group should take.
Benefits of Centralized Approach
KN Group's benefits from a centralized approach are the strong control on risk management
because when risk managers create risk strategies and communicate them to the back office, it
is less difficult to monitor compliance and other daily task activities.
Best practices and key knowledge from different parts of the organization can be brought
together to ensure a consistent strategy is developed while dealing with these risks.
Disadvantages of Centralized Method
Disadvantage of following centralize approach of risk function is referring to any unique
information which only operational or defined functional department may have and head office
may not be able to grab such information due to predefined risk management approach.
There are new jurisdictions where KN Group will now start operating in and need to ensure that
local cultures and compliance requirements are well understood. This often becomes a
challenge when organizations start working on a silo approach basis.
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How should KN Group Proceed?
As a head of risk management, KN group will adopt a hybrid approach to gather the information
and knowledge from the newly acquired companies (in the first phase).
All companies in the group follows a clear defined risk policy also a small strategic risk
management team will be established to assist operations department in their day to day
activities.
This approach will also enable existing employees with the confidence that acquisition will not
harm their vision however it also unveils Group long term vision across the board. KN group will
follow this approach at least for 5 years while reviewing it on quarterly basis through ERM
regarding the outcome of following this approach.
Risk Appetite
Determining the company's risk appetite begins with assessing its ability to take risks that is
Risk Capacity; which refers to the ability of a company to confidently resist risks when it occur,
and avoid adverse consequences such as product coverage’s, damage to the company's brand
image, credit rating constraints, default or bankruptcy.
Consider the definition of risk appetite in article “Risk appetite Revisit” by tower Watson (August
2013) as
“We define risk appetite… as the manner in which a company expresses an identified set of
risk-trading opportunities, and sets boundaries on its risk-trading opportunities, aligned with
successfully delivering on its mission”
To support the above statement Dave Ingram in his article “The surprising inconsistency of risk
appetite and risk tolerance statements March 2017” enlighten the risk appetite as the….
“Risk appetite defines how an organization weighs strategic decisions and communicates its
strategy to key stakeholders with respect to risk taking. It is designed to enhance management's
ability to make informed and effective business decisions while keeping risk exposures within
acceptable boundaries”
While reviewing the above statement, Risk appetite for KN Group is what board needs to
determine; how much of that capacity the company should expend, how much risk it should
assume and how rest should be kept; for instance, if management have a 5 years plan to
maintain stable profit then this approach will promote a more conservative approach to risk as
higher returns require higher risk underwriting.
Linkage Between Risk Appetite & KN Group Strategic Planning
Risk appetite, risk tolerance, and risk settings (key components of the risk management
process) not only focus on quantitative aspects such as Capital at Risk (CAR), but also focus on
various qualitative aspects such as target credit and reputation risk, Local & Group Regulators,
rating agencies and investors are also important components of strategic planning.
According to the hybrid model approach which cultivates the delegate underwriting authority, KN
group will first collect information, then track it and save it for future reference.
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However, KN group will provide all stakeholders with a risk appetite statement to pursue
sustainable growth methods and ensure that all (group) companies collect data to reduce or
prevent future risks and inform stakeholders of KN Group's tolerance level towards each risk.
Integration of Risk Culture
Risk culture is described as the behavioral norms of individuals and groups within an
organization, which determines the willingness to collectively accept or accept risks as well as
the ability to identify, understand, discuss, and respond to risks within the organization; it is
Divided into four categories, all of which should generally be used to achieve sustainable
organizational changes.
High Tone
The Board and the management should promote the risk culture together with new and existing
executives; justify words and deeds, fully consistent, clearly guide risk management activities
and assume full responsibility for violations of risk standards.
Communication
Actions may include conducting tailored training and education workshops on risk for senior
management. All workers should be encouraged to share knowledge, to feel comfortable in
confronting inacceptable conduct and escalating concerns instead of functioning as static advice
receivers.
Responsiveness
To create risk-aware culture at KN Group, the concerns problems should be addressed and
resolved quickly and resolutely.
Commitment
At some point, risk is secondary to everyone, not just to actuaries but to core risk groups. Highly
relevant cultural initiatives sometimes do not bring about sustainable change because they do
not have a people-centered focus towards risk culture awareness. To bring cultural change, as
a head of risk management; KN Group will directly identify and solve these problems in the daily
difficulties faced by employees, such as sales indicators, performance management and
management pressure on related payment systems.
Capital Management
Insurers sometime may not be able to show that checks are in place and are adhered to correct
reporting which don’t provide a genuine picture of the company. Therefore, by calling for more
risk-sensitive capital regimes as well as stress and scenario requirements; regulators have
raised the bar.
Consider the following statement mentioned in Mark Butterworth (“Risk Management in
Insurance”/Chapter 2)
“Insurer may carry a large amount of fund in reserve as a solvency margin or claim reserves. As
market confidence reduces, the book value of these assets is prejudice leading to requirements
for reserve strengthening and further capital demands. This will ultimately translate into need to
set higher premium to achieve a greater profit margin, otherwise the return on capital employed
becomes diluted that investor are unwilling to provide funds”
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The above statement may be supported by the case study mentioned in Cathy Hampson and
Gustavo Ortega in his book “The Fundamentals of Operational Risk for Insurers” Chapter 2 “The
Financial Crisis of 2008 and Subsequent Market Changes”
“The issue that caused it was that Equitable Life had insufficient funds to meet guaranteed rates
on annuities. In his report to Parliament in 2004, in relation to how Equitable Life’s woes had
arisen, Lord Penrose said that “principally, the Society (Equitable Life) was author of its own
misfortunes, regulatory system failures were secondary factors”. However, he also concluded
that “the practices of the society’s management could not have been sustained over a material
part of the 1990s had there been in place an appropriate regulatory structure adapted to the
requirements of a changing industry that happened to manifest themselves in an extreme form
in the case of Equitable Life”.
KN Group operating within the European Union will follows the Solvency II regime. It has been
observed that it fits into the wider development of upgrading supervisory frameworks and capital
requirements. This makes Solvency II extremely relevant for insurers outside Europe as well,
because sooner or later many insurers across the globe will come across regulatory updates.
While complying with Solvency II, KN Group will address the following directives to align with
the principles of fund management.
 Claim reserve practice
 Minimum capital requirement, Solvency Capital Requirement
 Information reporting and disclosure
To improve the UK supervisory system, the PRA proposed a new framework in the early 2000s
that came into force in 2005. This new framework is officially referred to as “individual capital
assessment” (ICA), but the term “individual capital adequacy standards” (ICAS) is also used.
With the ICA framework, the PRA clearly aimed for greater focus on fair value and a risk-based
approach.
It is evident that solvency capital is the excess of total assets over total liabilities. As mentioned
above that the acquisition of KN Group opens up huge growth opportunities but higher growth is
accompanied by higher participation. The most significant part of the liability for KN group is the
claim reserve that is; the amount should be set aside for claims.
However John Scott’s In his current role as head of sustainability risk defines the allocation of
reserves for longer period as..
“In an industry like insurance, where the underwriting process and the investment management
process can be pretty quickly adjusted on a real-time basis – and certainly on an annual basis –
the risks that we see looming can be dealt with way before they ever manifest,” he says.
“So, to a strong extent, the pushback from the insurance industry to the supervisory community
is: please, think carefully about linking these long-term climate scenario risk approaches to
solvency or to capital, and focus more on strategic thinking and actions. Because it just does
not make any sense to assign capital to a risk that may or may not happen in 20 years’ time.”
Regular evaluations are helpful however they do not necessarily mean that sufficient funds
allocated reveals enough funding thus significant underestimations can also shock the investors
and weaken confidence in the accounting processes eroded with the price of companies being
assessed.
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Recommendations
Appropriate Reservation for Unknowable Risks
As head of Risk Management, we may also learn regarding unknowable risk and its impact from
Covid-19 which not only shattered the economy at large but also remind the entire world
working industry to create the reserve for such risk. This verdict has supported by Kenneth E.
Scott statement
“Depending on your particular position, your primary focus might be on the management of risk
by financial institutions, or on the oversight of that management by government agencies
regulating financial institutions, or on businesses in their operations or dealings with financial
institutions and transacting partners. My perspective will mostly be centered on the latter”.
As head of Risk Management, we may also learn regarding unknowable risk and its impact from
Munich-re cyber update 2017 Global Ransom Attack known as the “Wanna Cry” where more
than 200,000 computers globally however in the UK, the greatest impact of this attack was
appeared on healthcare services.
Taking The strategy in to Business Plan
We need to define our risk absorbing strategy as a group in order to escalate it in to business
plan and look at business we are not comfortable with hence try to offload it over a period of
time. For example, the warranty and indemnity business in Ghana is something that we may opt
to discontinue over a period of time.
Manage Continuous Change
Even if the consequences of the risk can be tolerated, it must be controlled because future
changes may make the risk more difficult; such as: any product which don’t provide enough
coverage as well as address other areas of risk like monitoring of tolerable risk at different level
and interval through risk register, anti-money laundering awareness at a group level, Strong
check & balance on product distribution and its coverage’s.
Use of Risk Management Strategies
For KN groups, we agree that remedial action is always the first-rate area to start when
assessing risky hazards, thus If any alike harm is foreseen, KN group shall use clever risk
treatment strategies to reduce the negative impact on the market of its product disturbance. The
strategies will be identification of Low, Medium and High Risk Clients, monitoring of
FATF/NACTA/UN black list (Countries) to determine whether it is advisable that such jurisdiction
requires additional subscriptions or strict policy restrictions, KYC of policy holders, screening of
employees at initial and later stages, incorporation of additional risk reporting hierarchy (if
necessary), residual risk monitoring and further treatment.
Continuous staff training
Staff training is very important, and most organizations currently lack it. With the advent of
technology, employees need to be continuously trained to expand knowledge, participate in
market competition, and provide services to improve business.
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More emphasis on customer-oriented (Demand)
KN Group must develop a strategy that is oriented to customer needs rather than products. In
the modern world, customer expectations have multiplied. Users rather spending time to visit
insurance companies or brokers, they attract more towards advertised (services) for example,
digital advertising, Road shows, Online purchase of Policies, 24/7 assistance of after and before
sales services etc.
Conclusion
Mergers and acquisitions have gradually spread and their number and value have grown rapidly
around the world; however the latest Covid19 pandemic has hit insurance companies in the
form of a large number of claims, from postponing sports events to shattering acquisition
strategies; the current pandemic has compelled insurance companies’ to think other way
around, although KN Group can achieve its strategic objectives by reviewing stated above
research and development and following established guidelines.
As once said by Daniel Wagner (CEO/Country Risk Solutions)
“Some risks that are thought to be unknown, are not unknown. With some foresight and critical
thought, some risks that at first glance may seem unforeseen, can in fact be foreseen. Armed
with the right set of tools, procedures, knowledge and insight, light can be shed on variables
that lead to risk, allowing us to manage them.”
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Reference List:
Books
 Mark Butterworth (CII Study Text 2021/ Advance Diploma in Insurance /992 “Risk
Management in Insurance”)
 René Doff
“Risk Management for Insures” (Published on 29 JUNE 2015)
 Cathy Hampson and Gustavo Ortega
“The Fundamentals of Operational Risk for Insurers” (Published on 11 AUG 2017)
 Insurance Legal & Regulatory (CII Study Text 2021)
 Kenneth E. Scott
“The Known, the Unknown, and the Unknowable in Financial Risk Management”
(Published in 2010)
Internet
 www.theirm.org (Assessed on 04 June 2021)
 www.fca.org.uk (Assessed on 24 June 2021)
 www.bankofengland.co.uk/prudential-regulation/regulatory-reporting/regulatory-
reporting-insurance-sector (Assessed on 05 July 2021)
 www.eiopa.europa.eu (Assessed on 06 July 2021)
(www.register.eiopa.europa.eu/Publications/Consultations/EIOPA_EIOPA-BoS-14-253-
Final%20report Governance.pdf)
 www.willistowerswatson.com (Assessed on 14 July 2021)
www.willistowerswatson.com/en-NZ/insights/2017/03/risk-appetite-and-risk-tolerance-
statements
 www.hbr.org/2012/06/managing-risks-a-new-framework (Assessed on 15 July 2021)
 www.emerald.com/insight/content/doi/10.1108/JRF-09-2019-0183/full/html (Assessed on
19 July 2021)
 Risk Appetite and Tolerance Statement (Assessed on 20 July 2021)
www.willistowerswatson.com/en-NZ/insights/2017/03/risk-appetite-and-risk-tolerance-
statements
 Risk Appetite Revisit (Assessed on 20 July 2021)
https://www.fsb.org/wp-content/uploads/c_131011ae.pdf
 Understanding Corporate Risk Culture in Insurance (Assessed on 20 July 2021)
https://www.lse.ac.uk/accounting/Assets/CARR/documents/Risk-Culture-in-Financial-
Organisations/Think-piece95-Ashby-et-al-Risk-Culture-20May2013.pdf
 www.risk.net/risk-management/7846201/zurichs-scott-dont-levy-climate-risk-capital-
charges (Assessed on 22 June 2021)
 www.munichre.com (Assessed on 22 July 2021)
www.munichre.com/content/dam/munichre/contentlounge/website-pieces/documents/
HSBEI-1754.pdf/_jcr_content/renditions/original./HSBEI-1754.pdf
 www.directlinegroup.co.uk/content/dam/dlg/corporate/Documents/Directlinegroup-OAR-
2019.pdf (Assessed on 24 July 2021)
Survey, Report, Case Study
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 Irm –Report-A Risk Practitioners Guide to ISO 31000 – 2018 (Assessed on 4 June 2021)
 Airmic Guide 2020 “Risk & Insurance in Mergers & Acquisitions” (Assessed on 7 June
2021)
 www.demarcheiso17025.com/document (Assessed on 16 June 2021)
 “THE OPINIONS OF JULIUS PAULUS ADDRESSED TO HIS SON”
(S. P. Scott, The Civil Law, I, Cincinnati, 1932 ).
https://droitromain.univ-grenoble-alpes.fr/Anglica/Paul5_Scott.htm (Assessed on 02 July
2021)
 Novi Dewan “Indian Life and Health Insurance Industry” (Assessed on 02 July 2021)
 Tapas Kumar Parida, Debashis Acharya “The Life Insurance Industry in India (Assessed
on 18 July 2021)
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