RBS 2011 Annual Report Download - page 238

236 RBS Group 2011
Risk management continued
All the disclosures in this section (pages 236 to 246) are unaudited as
indicated with an asterisk (*).
Insurance risk*
Insurance risk is the largest inherent risk faced by RBS Insurance. It
arises through fluctuations in the timing, frequency and/or severity of
insured events, relative to the expectations at the time of underwriting. It
can be caused by any of the following core activities:
xPricing and underwriting;
xClaims management;
xReserving; and
xReinsurance.
RBS Insurance has continued to develop its approach to risk
management, including enhancing its risk function, to help ensure that
insurance risks are better identified, controlled, managed, monitored,
reported and mitigated. This is being achieved through the embedding of
an enterprise-wide risk management framework, with associated risk
appetite and policy frameworks. These are expected to have the following
benefits:
xaconsistent and disciplined approach to risk management;
xauniversal view of risk across the business;
xthe ability to influence decision-making and shape behaviours;
xareduction in loss events;
xthe improved use and allocation of capital; and
xenhanced return on risk adjusted capital.
Steps taken in 2010 and 2011 to enhance risk management have
resulted in RBS Insurance showing improved results in 2011 relative to
2010, although refocusing the division’s risk appetite has reduced
business volumes.
Governance and culture
RBS Insurance has developed a robust governance structure to control
the way it manages insurance risk. This structure includes various forums
and committees with associated delegated authorities for the
management of insurance risk.
Control and management
The internal economic capital model is rigorously controlled, with robust
validation processes applied to the inputs, the model and all outputs to
ensure that such data may be used confidently by the business in its
decision-making processes.
Stress testing and scenario analysis
Stress testing and scenario analysis take place on a regular basis to
support both the division’s individual capital assessment and the agreed
risk appetite. It is also employed prior to the deployment of new
products/lines of business.
Monitoring and reporting
Aclear framework is in place for the monitoring and reporting of
insurance risk within RBS Insurance, with well-defined processes and
procedures for the escalation and management of risks and issues.
Key insurance risks are monitored monthly at the Insurance Risk Forum
and loss ratio committees, with comprehensive management information
being presented regularly (i.e. monthly or quarterly) at the Executive
Committee, the Board and the divisional risk and audit committees.
In addition, comprehensive reporting of pricing strength occurs on a
monthly basis. Significant enhancements have also been made in the
reporting and monitoring of claims management and reserving. Further
enhancements are underway, including the launch of a risk management
system in late 2011.
Mitigation
The business has well-defined procedures in place to address any
issues, such as breaches of risk appetite, that are identified through
monitoring and reporting activities. In such cases, an action plan to
address the issue is developed, implemented and monitored through the
appropriate bodies, with a view to ensuring the risk is adequately
mitigated or a considered decision at the correct levels is taken to accept
it.
Operational risk*
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events. It is an
integral and unavoidable part of the Group’s business as it is inherent in
the processes it operates to provide services to customers and meet
strategic objectives.
Operational risk management
The objective of operational risk management is not to remove
operational risk altogether, but to manage it to an acceptable level, taking
into account the cost of minimising the risk against the resultant reduction
in exposure. Strategies to manage operational risk include avoidance,
transfer, acceptance and mitigation by controls.
The Group made significant improvements in its operational risk
framework during 2011, enhancing its management of operational risks.
This is particularly evident in respect of risk appetite, the Group Policy
Framework, risk assessment, scenario analysis and statistical modelling
for capital requirements. Further development will continue in 2012.
Details of these, and other elements of operational risk management,
including developments undertaken and planned, are set out below along
with the key processes through which the Group manages operational
risk.
*unaudited
Business review Risk and balance sheet management continued