Wednesday, 11 November 2020
Friday, 6 November 2020
Tuesday, 6 October 2020
Earlier this year, Crescendo Advisors undertook a survey of the insurers’ lessons learnt from managing Covid-19 disruption. This was based on in-depth discussion with 24 senior stakeholders with a turnover of about £120bn. We covered readiness before Covid-19, how the crisis was managed and lessons for the future.
In parallel, regulators were consulting on requirements for operational resilience. They do not plan to require firms to meet them before the end of 2021. This is then the time to think in earnest about implementation. One aspect of the requirements is learning from events like Covid-19. We thought that we would review our findings and identify what we can learn for the implementation of operational resilience.
Broadly speaking we identified two contrasting views. Some saw Covid-19 as an unprecedented event and thought that there was little that could be learnt for the implementation of operational resilience. Others were concerned that the industry’s success at keeping the show on the road could give an impression that operational resilience is not an issue. We do not subscribe to these views and identified five practical lessons, which is more consistent with the Goldilocks approach – not too little, not too much.
Lesson 1: Do not assume that you will get the same advance warning for the next operational resilience event
While few firms anticipated a pandemic of the scale of Covid-19, firms had a 6 to 8 weeks before lockdown to prepare, which many used very well to prepare for the inevitable lockdown and social mobility restrictions that were anticipated. Our survey suggested that industry readiness would have been very poor absent these preparations.
Looking ahead, it is unlikely that in the type of operational resilience scenarios that are more likely in the future, e.g. system failures, firms will have such a luxurious amount of time in which to enhance your resilience.
Lesson 2: Invest in crisis management as part of operational resilience preparations
Operational resilience requirements rightly focus on governance, planning (identification of key business services, setting tolerance and analysis of resilience in severe but plausible scenarios), and enhancing resilience where it falls below the agreed tolerance.
However, when an operational resilience event takes place you will also need a well-oiled crisis management capability. Participants who chanced to have tested crisis management capabilities before Covid-19 noted the benefits from that. It is important to review and test your crisis management capabilities (e.g. war games) as part of the implementation of operational resilience.
Lesson 3: Working from home (WFH) is useful but challenges your potential back-up
The ability to work from home was a key aspect of the response to Covid-19; at the same time recovery sites proved to be not very useful in this scenario. This has also led to a wider discussion about the role of the office and the possibility of home being the new BAU. But if WFH is the new BAU, what is the back-up for the next operational resilience event?
Lesson 4: Think about scenarios and stress testing in an integrated manner
While insurers considered scenarios before Covid-19, few anticipated a pandemic of this scale with all of its financial and economic implications. Looking ahead at the development of scenarios for operational resilience, this raises a challenge about the importance of consistently considering the financial and operational implications of scenarios in ORSA and operational resilience.
Lesson 5: Outsourcing of key activities is likely to be a challenge for operational resilience
Participants identified outsourcing as an area where they would like to spend more time monitoring performance. Where outsourcing was material, the experience of Covid-19 was mixed. Interestingly, good performance during Covid-19 in outsourcing was associated with a business rationale going beyond cost savings or managed as an integral part of the business.
These are industry lessons. But what lessons can you extract from your own business experience of managing Covid-19? We encourage you to formalise the lessons learnt exercise. You may learn something new or unexpected about your business. But more generally the exercise can inform wider decision making; one insurer had a clear vision that their Covid-19 lessons learnt should feed into a strategic review. At the very least it will support your operational resilience planning and delivery.
This post has been written by Isaac Alfon (Managing Director) and Shirley Beglinger (Advisory Board Member) from Crescendo Advisors. It is based on a presentation to ORIC’s Covid-19 Industry Group.
Crescendo Advisors (www.crescendo-erm.com) is a boutique risk management consultancy. We would be happy to share an overview of the findings from the Covid-19 lessons survey. We can also support your efforts to both learn lessons from Covid-19 using the tools we developed for this survey and implement the regulatory requirements for operational resilience.
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Tuesday, 22 September 2020
The UK High Court handed down its verdict on the Financial Conduct Authority’s test case on Business Interruption on September 15. Some of the 370,000 policyholders affected will now be hoping to receive insurance payouts in time to stave off bankruptcy. Others will now be considering whether they have viable grounds for appeal.
There were a number of battlegrounds in the case. BILA (British Insurance Law Association) will be holding a webinar on September 28, but in the meantime some of the interesting points were:
- Causation: The Court held that the proximate cause of the business interruption was the composite peril of the business interruption following the occurrence of the notifiable disease. Individual outbreaks were deemed to be part of a national whole.
- Public authority and prevention of access clauses differed between the policy wordings under consideration, with some being deemed to provide narrow, localised cover while others were deemed to respond to government regulation when it was issued on March 26.
- Trends clauses are relevant to the calculation of the insured loss because they take account of the circumstances/trends of the insured business. Insurers relied on the decision in Orient Express Hotels v Assicurazioni Generali Spa (UK)* to argue that the insured could not show that the business loss would not have been suffered ‘but for’ the insured peril because many businesses would have suffered loss in any event due to the Covid-19 epidemic. The court felt that Orient Express had been incorrectly decided and therefore did not follow the precedent.
Appeals from both sides are likely, and then a key question will be whether the Court of Appeal chooses to hear the case or leapfrog it straight to the Supreme Court. An expedited appeal might be heard in late 2020 / early 2021, but not even that will really bring closure. Major UK insurers who are not currently part of the FCA test case will likely find that policyholders seek to read judgments across to their coverage, and thus find themselves embroiled in coverage disputes.
Meanwhile in the background and on the sidelines, the skirmishing will continue.
The FCA has published a Dear CEO letter suggesting quite strongly that insurers should not seek to deduct furlough and similar government payments from any claim settlement, but they have not provided any guidance on how else such payments might be fairly treated.
Reinsurers have already given strong indications of their intention to scrutinise any payments which insurers may make and for which they may seek to recover under their reinsurance arrangements. Certainly catastrophe reinsurers will be considering:
- The operation of hours clauses: the treaties are designed to respond for specific identifiable events such as earthquakes and windstorms. In the case of a disease outbreak, is it a natural catastrophe? When does the event begin and end? Is it one event, or several?
- Loss quantification: if an insurer has been using poorly drafted policy wordings which resulted in coverage being awarded where none was intended, can the reinsurer argue that this qualifies as some sort of ex gratia payment and is hence not recoverable?
- Loss aggregation: a large composite insurer may have multiple portfolios of risk – say SME property/BI, marine and event cancellation (to name just a few). If treaties are written on different bases (eg occurrence vs risks attaching) how will insurers aggregate their losses?
And so the Business Interruption battle will grind onward – in adjudication as well as in arbitration. Certainly many new precedents will be set. It’s an interesting time to be considering insurance and reinsurance disputes.
* Trading as Generali Global Risk,  EWHC 1186 (Comm).
This post has been written Shirley Beglinger (Advisory Board Member) at Crescendo Advisors.
Crescendo Advisors (www.crescendo-erm.com) is a boutique risk management consultancy. Crescendo Advisors has a solid track record of successful engagements in both adjudication and arbitration.
Wednesday, 9 September 2020
Covid-19 is a health crisis, a business crisis and an economic crisis which has struck the insurance industry hard.
Claims spiked in some areas while volatile financial markets made it almost impossible to steer the investment portfolio, and lockdown measures kept staff at home while struggling to cope with surging call and claim volumes. Meanwhile, there is vocal pressure from some quarters for a “flexible” approach to claims, where “flexible” is shorthand for dishing out large amounts of money for claims which may or may not be covered.
How has the industry coped, and what lessons has it learned?
To answer that question, Crescendo Advisors carried out a series of structured interviews with a selection of risk and finance professionals from insurance firms. Most of the firms were UK based, with an aggregate turnover of £120 billion in 2019.
Although the firms varied in size and portfolio mix, there was a high degree of consensus in their opinions. Here are Crescendo’s top five findings and conclusions:
- While most UK firms have weathered the crisis to date, it appears that few did so as laid out in their pre-Covid-19 business continuity planning. Business continuity plans usually assumed local outbreaks and had to be re-created in the face of a total and global shutdown.
- All firms who viewed their lockdown experience as ‘successful’ attributed that to excellent, ongoing communication from senior management to all stakeholders;
- The traditional hostility to staff working from home has changed from “not possible” to “why not?”. Going forward firms expect staff to continue working at least part-time from home, and hence plan on reductions in their office footprint;
- As remote working and virtual teams have become the post-Covid vogue, the purpose and value of The Office is being critically re-evaluated. It may still be the best place for meetings and staff onboarding, but do we really need all those desks crowded together?
- With staff working remotely, the cost-benefit dynamic of outsourcing could be changed so that firms will find it beneficial and desirable to bring activities back in-house.
Interestingly, while most participants anticipated the need for a lessons learnt exercise, only one of them acknowledged at the time that his firm was already kicking off such an exercise.
Are insurers perhaps being complacent? They had six weeks to prepare for lockdown and they put the time to good use. By the time staff were required to stay home, many did so with newly acquired laptops and secure connections. The main limitations on productivity came from the lack of suitable home office facilities or from inadequate broadband speeds. The show stayed on the road with remarkably few wobbles.
Next year UK insurers are likely to work in the implementation of operational resilience requirements. There are lessons to be learnt from Covid-19. But here’s a thought, if working from home is no longer the backup disaster recovery plan – it is the new normal – what is the new disaster recovery plan?
This post has been written by Isaac Alfon (Managing Director) and Shirley Beglinger (Advisory Board Member) at Crescendo Advisors.
Crescendo Advisors (www.crescendo-erm.com) is a boutique risk management consultancy. We would be happy to share an overview of the findings of this survey. We can also support your efforts to both learn lessons from Covid-19 using the tools we developed for this survey and consider the implications of working from home arrangements for the risk and control environment.
Sunday, 14 June 2020
There are many aspects of such an operating model. Some are practical, such as ensuring that the tools integrate with other parts of the business. In this post, I am focusing on the delegation of decision making to the AI tool – the choices that exist in most cases and the implications for the control environment. These are summarised in the figure below.
At one extreme of the delegation of decision making, you have AI tools that operate independently of human intervention. An example is algorithmic trading or an automated trading system which trade without any human intervention to use the speed and data processing advantages that computers have over a human trader. Interestingly, this also represents one of the few prescriptive examples of PRA intervention where it requires that a human has the possibility of stopping the trading system.
At the other end of the spectrum, there are AI tools used by experts in a professional environment. For example, actuaries might use machine learning techniques to undertake experience analysis and support reserving work.
Between these two examples, you have AI tools that provide a forecast or recommendation for consideration by an analyst. For example, the AI tool could provide a credit rating that validates a rating derived using more traditional methods.
Another middle of the road alternative is ‘management by exception’. This means that the AI tools have a degree of autonomy to operate within a ‘norm’, which is inferred from historical data. Cases that are outside the norm are then referred to an analyst for consideration to improve and verify the predictions.
These are business choices and in turn have implications for the development process of AI tools. You would expect controls around data and model documentation in all cases. But broadly speaking you would also expect a tighter control and a more intense validation for AI tools that operate more independently of human intervention. This includes the depth of model’s understanding, including:
- explainability – why did the model do that;
- transparency – how does the model work;
- the impact on customers – e.g., the difference between Netflix recommendations and credit card underwriting.
The choices of operating model also have important implications for staff training. AI tools operated by staff that have not been involved in its development must be trained to the appropriate level to ensure that the AI tool operates effectively. For example, where ‘management by exception’ is adopted, staff would need the appropriate knowledge and skills to deal with the exceptions.
There are important choices for the operating model into which AI tools are deployed. These choices have risk management and control implications and these choices may change over time. An AI tool might start operating in an advisory capacity. As trust in the AI tool increases then the delegated decision making can be increased.
These implications and choices should be considered as part of the model design.
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Wednesday, 26 February 2020
It is worth noting that in this enforcement case, it appears that the FCA had no obvious concerns about the relevant policies and procedures reviewed.
It is important to recognise that assurance should be provided about the processes and about the outcomes. Where the nature of the issue involves considering customers’ individual circumstances in response to financial difficulties, then it is important to evidence that the range of options set out in the policy have been delivered. This is more challenging to monitor than following a process.
Monday, 27 January 2020
Thursday, 1 August 2019
- The articulation of the ERM vision is progressing but there is still work to be done. There is a sense that, broadly speaking, people operate according to the ‘protect and enable’ vision without articulating it as clearly as it could be.
- Good progress has been made articulating how to deliver and embed ERM in businesses; all businesses have ERM frameworks and policies in place. Some are considering external reviews after the frameworks have been in place for some time.
- The biggest challenge ahead is evidencing ERM implementation and providing structured assurance to the Board about ERM expectations. This is a challenge for risk management function (risk reviews?), first line (business and control reviews?) and internal audit (coordinate with first and second line?). Please get in touch if you want to receive a paper with initial thoughts on this challenge.
Thursday, 18 July 2019
Earlier this year, I gave a presentation to a group of actuaries - the Network of Consulting Actuaries - on the challenge of adopting Artificial Intelligence tools in Financial Services and how risk management help. I have transformed the speaking notes into a paper - here.
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