Insurers lagging in doing risks testing

Central Bank of Kenya building in Nairobi. FILE PHOTO | NMG 

By GEOFFREY IRUNGU

More by this Author

Summary

• Following a survey of risk executives in 20 insurance companies, KPMG found that three out of every four underwriters are not doing scenario and risk testing.
• The situation is completely different in commercial banks, which have been carrying out stress testing since 2016 following the collapse of several institutions.
• Related to the testing is that underwriting firms have lagged behind in optimising risk and control in the sense that hardly any firm has information privacy frameworks, for example.

Most insurance companies are lagging behind in stress testing, a new report by audit and advisory firm KPMG Kenya says.

Following a survey of risk executives in 20 insurance companies, KPMG found that three out of every four underwriters are not doing scenario and risk testing.

The situation is completely different in commercial banks, which have been carrying out stress testing since 2016 following the collapse of several institutions.

Related to the testing is that underwriting firms have lagged behind in optimising risk and control in the sense that hardly any firm has information privacy frameworks, for example.

Most of the insurers are also yet to adopt risk-based capital allocation, the report said.

Last year, the Insurance Act was amended to provide that insurers increase their capital by 2021 and allocate it such that it is commensurate with the risk that they carry in their business.

“Seventy-five per cent do not take into consideration scenario and tress testing analyses. Ninety-four per cent are yet to adopt risk-based capital allocation. Zero per cent utilise automated real-time risk dash-boards for continuous monitoring,” said the KPMG report.

The survey found that there is a limited number of companies, 13 per cent, using IFRS 9, which stresses provision for credit default at the time of giving it, and IFRS 17 that calls for proper recognition of cash flows and appropriate placing of finance income or expenses as well as separation of insurance premiums from investment income.

s

“Only 13 per cent of the surveyed insurers utilise IFRS 9 & 17 information in the strategic and business decision making process.

The survey also shows only five insurers have embedded a risk appetite framework in their decision making process.” In total, less than half of the insurers are controlling and optimising their risks.

“The insurance industry still encounters difficulties in controlling and optimising their risks. With only 37 percent of the surveyed insurers have implemented and embedded this component of the enterprise risk management framework,” said the report.

The survey also found that many insurers were monitoring risk even though most had not done an assessment of its extent. “There seems to be a case of putting the cart before the horse when it comes to risk assessment, risk monitoring and reporting. … Organisations seem to be keen on reporting the risks without carrying adequate risk assessment.”