Page 22 - The Insurance Times November 2025

robust and sophisticated risk management framework is not faces the maximum interest rate risk. Because the
just a matter of good governance but a core strategic insurer has contractually guaranteed a fixed maturity
imperative. It is the bedrock upon which an insurer builds amount, it bears the full risk of interest rates falling
its solvency, ensures compliance with a complex regulatory below the level assumed at pricing, which can compress
landscape, and ultimately achieves sustainable, long-term investment margins and threaten profitability.
growth. An effective framework allows an enterprise to
proactively identify, assess, manage, and monitor the myriad 2.2 Equity Risk
of risks it faces, transforming potential liabilities into Equity Risk is the risk of loss arising from fluctuations in the
managed exposures. value of equity investments. For an insurer, this risk primarily
originates from equity holdings within portfolios backing
This article provides a structured analysis of the primary risks participating products and from the administration of unit-
confronting an insurance enterprise. It will categorize these linked business.
exposures into three core areas-Financial, Insurance, and
Operational & Enterprise Risks-and detail the corresponding The level of risk differs substantially between these two
management strategies and their integration into core categories. For participating products, the proportion of
business processes. investment in equities is typically small, meaning the risk
from a downturn in the equity market is considered minimal,
2.0 Core Risk Category: Financial Risks and is often accepted by the company.
Financial risks are those that stem directly from movements
and volatility within financial markets. These risks have a In contrast, for unit-linked business, while the direct
direct and often immediate impact on an insurer's balance investment risk is borne by the policyholder, the insurer faces
sheet, affecting the value of its assets, the present value of a significant secondary risk. A sustained period of low equity
its liabilities, and its overall profitability. Understanding and market performance can cause unit prices to fall, potentially
managing these exposures is fundamental to maintaining the prompting policyholders to lapse their policies to secure the
financial stability of the enterprise. The following sections remaining fund value. This can lead to a mass withdrawal
detail the primary categories of financial risk and the key event, impacting the company's fee income and asset base.
strategies used for their mitigation.
2.3 Liquidity Risk
2.1 Interest Rate Risk Liquidity Risk is formally defined as the risk that a company,
despite being solvent, has inadequate cash to meet its
Interest Rate Risk is the potential for an insurer's actual
liabilities as they fall due or is forced to generate liquidity
investment earnings to be lower than the expected earnings
by selling assets at a loss. This risk can be triggered by events
assumed during pricing due to adverse movements in
interest rates. The severity of this risk varies significantly on both the asset and liability sides of the balance sheet.
across different product lines, depending on their structure Asset-Side Triggers:
and the nature of the guarantees offered to policyholders. o Over-investment in illiquid assets, such as property,
Unit-Linked Products: This risk is minimal, as the
which cannot be quickly converted to cash.
investment risk, including the impact of interest rate
fluctuations, is passed directly to the policyholder. o The need for a "fire sale" of assets at discounted
prices to meet urgent cash demands.
Term Products: Risk is generally lower in standard term
products because they typically do not have a maturity o Bulk sales of assets impacting market prices.
or cash value. However, certain variants, such as those o Concentration risk in certain asset classes.
with longer tenures or a return-of-premium feature, o Adverse movements in exchange rates affecting
carry a higher degree of interest rate risk.
the value of foreign assets.
Participating Products: This risk is partially mitigated.
o A fall in the credit rating of a third party, affecting
In the event of lower-than-expected investment
the value or marketability of held assets.
earnings, the insurer has the flexibility to adjust the
annual bonus rates distributed to policyholders, thereby o The drying up of established lines of credit.
sharing the impact of adverse rate movements. Liability-Side Triggers:
Non-Participating Products: This product category o A "mass surrender" event, where an unexpectedly

20 November 2025 The Insurance Times