11 January 2022
At our recent LCP Insurance CRO roundtable, we discussed the role that CROs play in strategy setting. Several CROs highlighted experiencing a natural tension as a result of two slightly different roles that they perform during the process.
One role is working with management to come up with the strategy as part of the “first line” team. CROs have a clear view on all the risks that the insurer faces, what the potential emerging risks are, and what the potential opportunities might be. Bringing in this viewpoint early helps set a good direction for the risk and strategic discussion.
The other role is as a check and balance on the overall process, for example measuring the key risks and making sure they are within the overall risk appetite of the firm. This role requires some distance and objectivity from the team coming up with the strategy. This role is often performed later, when there is a broad overall plan, but there are still some decisions to be made, for example where to grow and by how much.
Getting the balance right can be tricky. If you don’t get involved early enough then you can end up being the one who has to explain to the board why things aren’t right and why the plans don’t stack up. Conversely if you get involved too closely in the early phase, then the review can feel like marking your own homework.
It’s important that there is still healthy challenge of the business plan, and that those challenges are focused in the most important areas. If you aren’t getting at least some challenges that can be a warning sign that the balance is not right.
One area where you may be able to spot this is in the ORSA. Different sections can often be written at different times, and by different people. This can lead to a focus on bottom-up detailed analysis, as well as an overall ORSA framework that doesn’t evolve sufficiently from year to year.
Taking a fresh “top-down” review can be very useful, looking at the way that the elements of the ORSA process interrelate.
- Does the risk appetite capture all of the key risks faced by the firm, including those that might be evolving rapidly?
- Do the various risk scenarios target the key strategic risks?
- Do the learnings from the risk scenarios and other modelling clearly feed back into the strategy setting process?
- Are your objectives for reinsurance still aligned with the overall strategy? These are the sort of questions we consider when providing independent review and challenge of our clients’ ORSAs.
In summary, the key take-away for CROs is to ensure you have an appropriate balance between:
- Bottom-up and top-down assessments of risk, and
- Engaging appropriately with the first line strategy process, but also ensuring sufficient independence to be able to provide second line challenge.
Keeping this in mind will ensure CROs are well placed to add value to the business planning process.
If you would like to join our CRO roundtables in 2022, please get in touch.