Assessing the Governance and Risk Management of an Insurer and its Insurance Group
Part one
Acquisition of a life insurer in trouble
A life insurer in Northland called Long-Life had experienced some solvency problems the last couple of years and its capital position needed urgently to be strengthened. A global insurance group and its holding company,Success-Story,offeredto buy the life insurer and make a significant capital injection. The supervisor of Long-Life wasn’t familiar with the insurance group nor its holding company, which was located in another jurisdiction, but the capital injection was restoring the solvency position to an acceptable level and the supervisor therefore welcomed the offer.
Senior management, members of the board and control functions
The holding company changed the CEO of Long-Life and replaced him with a dynamic young man, whomthe CEO of Success-Story knew well and thought would be suitable for the job. Four board members were also exchanged, three of the new members also sitting on the board of Success-Story and the forth being a retired CEO with extensive insurance knowledge. The remaining four members consisted of the new CEO, who was also the Chair of the board, the other three having been on the board for the last 15 years. The CRO and the Head of Internal Audit of Long-Life left shortly after the acquisition and had to be replaced with new recruits. The CEO recruited them shortly after, having personally vetted their merits from the insurance sector.The rest of the staff otherwise remained the same.
Part two
Competing to become the leading insurer
To gain market shares, Success-Story ordered Long-Life to get into new products and innovate. At the same time Long-Life was instructed to press the prices in order to compete with the leading firms in the local market. To achieve the goal of becoming the leading company,Long-Life was furthermore instructed to offer high guarantee products.
Long-Life grew considerably at first due to the high interest rates andgood investment climate. There was, however, a significant increase in the expenses to fund the growth, with much smaller increase in expense recoveries from the new revenue streams. Due to the then leading positionin the local marketand the success of the guaranteed products, Long-Lifecontinued to offer them although interest rates were starting to fall to worrying levels. To compensate for the low investment return, Long-Life sold off its government bonds to invest in high yielding assets. Although these assets were poorly matched to the liabilities,Success-Story considered the risk of the mismatch negligible and instructed Long-Life to go ahead with the asset switch. The assets were initially performing well butstarted to loose in value after some time. Long-Life was instructed to keep up with their investment strategy, in hope that they would become profitable again.
The Appointed Actuary and the Investment Committee of Long-Life had major reservations to the strategy of the groupand wanted to change it locally for Long-Life. Thestrategic direction as outlined by the CEO of Success-Story had, however, proved successful in the past, so the Board of Long-Life chose to disregard their criticism and stick to the outlined group strategy. As a consequence, the appointed actuary left shortly after but she was soon to be replaced by a new hire.
Part three
Lending a helping hand
Long-Life’smain competitorin the Success-Story group, the life insurer Confidence, which was located in a neighbouring country to Long-Life’s, started having liquidity problems due to problems experienced in its guaranteed life insurance productsand illiquid asset portfolio. Confidence could not get affordable loans in its market due to itssolvency problems, which were publicly known. Long-Life was therefore instructed by Success-Story to lend them the sums needed and to do so on favourable terms so that Confidence could sort out its problems. The board of Long-Life saw no other solution than to provide the loan on the indicated terms and they were later to extend the loan as Confidence’s liquidity problems grew and more capital was needed urgently.
The end
Despite the loans, Confidence’s problems couldn’t be solved and they later had to cease payments and go bankrupt. This bankruptcy was soon to be followed by Long-Life’s, which had lost considerable money on guaranteed insurance productsand the loans to Confidence that were never repaid. The asset portfolio of Long-Life hadfurthermore lost in value and become illiquid. There was no group support from Success-Story, which decided to divest Long-Life and Confidence as they were considered less crucial to the group’s strategy and reputation. There was not enough money left for all of Long-Life’screditors, including theirpolicyholders, which had to take a cut in what was owed to them.
Instructions and questions:
The supervisor of Northlandlost its reputation as a consequence of the bankruptcy of Long-Life. The Head of the supervisory authority had to leave and a new one was recruited. She started her job with high ambitions and the objective to make the regulatory framework and the supervisory actions compatible with international standards and best practice. A working group was created to look into the lessons that could be learned from the failure of Long-Life. As such you should consider:
- what were the problems, and howcould they have been spotted
- what framework should be implemented to avoid similar problems in the future;and
- what actions would have been advisable at the time, had the new framework already been in place
Based on the timing of the events and the severity of the problems, different actions would be suitable at different points in time. Please therefore respond for each section separately(part one-three).