Operational resilience – how actuaries can play their part

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There has been much international focus in recent times on the operational resilience of insurance and reinsurance firms.

Operational resilience – how actuaries can play their part

Before discussing recent regulatory efforts, the benefits of being operationally resilient, and how actuaries can play their part, let’s begin with a quick reminder of what it means for a firm to be operationally resilient.

Essentially, an operationally resilient firm has the capability to identify the key services it provides to customers, wider market participants and other stakeholders, to identify and remediate vulnerabilities in the delivery of those services, and to effectively respond to, remediate and learn from disruptive events which impact negatively on its ability to deliver those services. In doing so, an operationally resilient firm will also minimise the disruption experienced by the users of these services. Clearly, achieving operational resilience can require a significant effort.

Across the EU, UK, Asia, Australia and the US, regulators have been putting more and more focus on the topic of operational resilience. The associated regulatory requirements and expectations are at varying degrees of development, but amongst those leading the way are the Basel Committee on Banking Supervision [[1]], the Central Bank of Ireland [[2]], and the Bank of England, Prudential Regulatory Authority and the Financial Conduct Authority through their joint policy statement outlining their approach to operational resilience across the financial services sector [[3]].

Operational resilience improves decision-making by prompting firms to focus resources in the right areas.

So, what are the benefits of operational resilience? Severe disruptive events can have material, adverse consequences for customers, the insurance industry as a whole and indeed the wider economy. If and when such events occur, operationally resilient firms should be better positioned to survive the impact and emerge in good shape. Being in a position to continue to provide key services to customers, the wider market and to other stakeholders in the face of severe disruption, means that such firms can help to mitigate the impact of such an event, rather than simply contribute to it. Through creating a deep understanding of the key services being provided, vulnerabilities and inter-dependencies underlying the delivery of those services, coupled with an understanding of the point at which the unavailability of such services will lead to real harm, firms can make appropriate plans to minimise disruption. Operational resilience improves decision-making by prompting firms to focus resources in the right areas.

How can actuaries play their part? There are many opportunities. As risk managers, actuaries are already familiar with operational risk. In the development of operational risk controls, aimed at reducing the overall impact and/or probability of operational events occurring, actuaries can for instance assist with building resilience where operational vulnerabilities have been identified. Indeed, in order to identify such vulnerabilities in the first place, firms will need to employ scenario testing to supplement any lessons learned as a result of actual disruptive events having occurred. Actuaries also have much to offer in generating severe but plausible scenarios for the purposes of such analyses and their insights can make a real difference.

All of this leaves actuaries very well positioned to help firms to become operationally resilient. With increasing attention being paid by regulators, expectations are that operational resilience will continue to be a hot topic for some time to come. There is a great opportunity for actuaries to establish and consolidate a clear role within operational resilience planning and implementation and national actuarial associations (such as Koninklijk Actuarieel Genootschap) can play a key role in helping to make this happen.

This blog was written in a personal capacity.

[1] Principles for operational resilience

[2] Cross-industry guidance on operational resilience

[3] Operational resilience: Impact tolerances for important business services

Over de auteur

Eamonn Phelan FSAI CERA

is principal and consulting actuary at Milliman Dublin