Bermuda Re spoke with Susan Patschak of Canopius, Bermuda about the company’s enterprise risk management strategy and how recent catastrophe events and asset side ‘cats’ shaped its approach to risk.
Enterprise risk management (ERM) has grown increasingly sophisticated in recent years, with Bermuda and global reinsurers embedding a thoroughly strategic approach to risk into the day-to-day operations of their global business. Regulators and the rating agencies have at the same time placed increasing demands upon reinsurers’ ability to quantify, understand and mitigate risk, driving ERM further up the agenda for reinsurance management, particularly in the face of soft and sometimes troubled market conditions. Here we talk to Susan Patschak, chief executive officer of Canopius Bermuda, about the Canopius Group’s own particular approach to ERM and risk and find that instilling buy-in through a top-down approach is an essential part of the process.
What are the major elements of Canopius’ ERM strategy?
Risk taking and risk management are an inherent part to the group’s business activities. The adoption of sound risk management practices is considered an imperative by management and the Board and fundamental to the ongoing success of the Group.
The risk management processes and their enabling governance structures are designed to provide comprehensive control over and ongoing management of the significant financial and nonfinancial risks facing the group including: strategic, reputational, underwriting and the marketplace, financial (credit, market andliquidity) including the investment environment, operational and legal/regulatory.
Turning to the first two of these points, strategic ERM is all about our group overview and in making sure that our overall ERM framework filters down throughout the group. It is about making sure that everyone is on the same page throughout the organisation and implanting in the team the importance of ERM best practice.
Another ERM focus is reputational. I think of our reputation as an underwriter – in other words how we deal with brokers and our clients – and in terms of brand reputation - how the marketplace views us. Here at Canopius, we are very keen on trying to be a bit different, yet making clear to people that we are very serious about our business and that we add value every chance that we can.
How have you sought to integrate and instil enterprise risk management into the day-to-day operations of Canopius?
The cornerstone of the Group’s risk management process is the development and embedding into ‘business as usual practice’ of a strong risk management and control culture supported by an enterprise wide set of policies and practices. We are big on controls and diarying due dates for different activities. There is significant integration between our operations and the underwriting side of the business. We ensure that everybody complements one another and understands their individual roles when it comes to meeting deadlines, and thinking about corporate governance and controls. A lot of it is down to being conscious of what is due when, and what needs to happen. It’s one thing to put down on paper that you are going to carry out these risk management processes, it’s another thing altogether to show that you are reviewing and monitoring these procedures on a continuous basis.
Is it very much a top-down approach?
Yes, it does come from the top and I think it has to. If the leaders do not live it and act upon it, it is difficult to disseminate and encourage ERM practices throughout the organisation.
However the first line of defence involves all members of staff at every level within the business who have a responsibility for identifying, taking and managing risk in their area.
Has ERM affected your risk appetite?
Yes, it has. We have always been conscious of desiring events to be balance sheet events, rather than capital events and I think that because we are privately owned, and that each of us has a stake in any event that happens, we are rather more conservative than our peers.
How can ERM help you to optimise your allocation of capital?
I think the biggest struggle for companies is to get their underwriters to buy in on the method to allocate capital and the end results. Everybody has in their mind who should get the most capital, but when you actuallysit down and examine your capital allocations, often times results are very different to what would have initially been thought.
One of the challenges of capital allocation is ensuring the underwriting team understand the framework for allocation and that the results do provide evidence as to where capital should be deployed. This is the hardest part, providing an explanation that the underwriters understand and want to buy into.
I understand that Canopius has diversified its portfolio away from sovereign debt and into more corporate bonds.
Yes. Potential ‘cats’ on the asset side are something we are constantly concerned about and our investment strategy has always been very conservative in nature. People are very nervous about the euro and for our part, our portfolios have no exposure to peripheral Sovereign debt and have been positioned to minimize Euro risk. With corporate credit cheaper and companies with improved balance sheets it makes sense to make a bit more of a play into corporate bonds.
Is there a danger of a long-term threat being created by reinsurers investing in riskier, higher yield investments?
You always hear companies saying that they write to a gross result as opposed to a net result. The investment side of the business does not form as much of the wider strategy as it did in the past. The Today it is about solid underwriting with appropriate returns without thinking about the contribution investment returns make. The entire investment sphere is too uncertain to have it play a part in the overall profit-making performance.
What significant ERM lessons have emerged on the cat-side from the last eighteen months?
One of the main lessons is that the perception of risk is now very different. People now understand that there is significant interconnectivity in the cat space, particularly on the earthquake side. We have always been so concentrated on hurricane season, but it seems that its earthquake season all the time! More companies will be concentrating on earthquake exposure and recognising that it is both more risky and more costly than initially thought.
"ERM ensures that you keep a perspective on what is the real exposure despite recent loss free years and the uncertaintly of future events."
In the case of Japan, it is difficult to line everybody up and say ‘that company’s losses were less than another company’s losses’ without looking at how long the company has been in business. For anybody that has ever worked in Japan, they know that you have to build those relationships over time. There are companies that are patting themselves on the back saying that their Japanese losses were not that high, but for many of them it was due to the fact that they did not have the relationships in place to get the participation they would have wanted on programs.
What affect have recent events had on your strategic thinking?
It has made us think more about our low severity business to ensure that this business is “firing on all cylinders”. This will give us a buffer and hedge against those years with numerous severity losses. I have to believe others are thinking in the same vein.
How can strong ERM help guard against potential black swan events?
Brokers often talk about remote events, but when they do, I refer to examples of the levees breaking in Louisiana, the tsunami in Japan and the two earthquakes in New Zealand. The point is that anything can happen and just because there has not been a hurricane that has hit Florida in a number of years, it does not mean the exposure is any less. That risk is still there. ERM ensures that you keep a perspective on what is the real exposure despite recent loss free years and the uncertainty of future events.
How significant is ERM when considering M&A and how can you look to integrate and translate ERM strategies across disparate firms?
It is always refreshing to see how other people are managing their business. Having a look at a different perspective is beneficial and can help prevent you becoming somewhat insular. One of our strengths at Canopius is fixing what is broken. When acquiring other firms, for the most part we implement our own ERM strategy. People talk about a merger of equals, but it never is – someone always emerges as the victor and will be the one to lay the course for ERM. If M&A targets have suggestions, as a group we are open to ideas and no one is afraid to speak up and suggest change within our organisation.
What are the major ERM challenges in the M&A process?
Ensuring that proper and thorough due diligence takes place and then instilling our vision of ERM with new staff. You never want something uncovered after the acquisition that was missed during the process. However, when it comes to staff, we can tell very early on whether people have the Canopius ilk. We know what it looks like and it takes us a relatively short amount of time to discern whether someone is a good fit with our organisation.
What could reinsurers do better in terms of ERM?
The issue is how to instil ERM throughout the organisation. It is one thing to have the framework, ideas and controls, but having the buy-in of everyone in the organisation is paramount for success.
ERM, Canopius, CEO