with piracy-related information and the Managers have strongly recommended that owners take care to follow the industry Best Management Practices when sailing in the high risk area – which now extends almost to the shores of India. The need for self-defence has never been higher and a number of Members with ships having low speeds or low freeboards have assessed the risks as justifying the use of
armed guards. Armed protection could eventually have its own dangers, especially if pirates counter stronger defences with stronger attacks. The Club recognises that there is a role for the use of private guards or (preferably) vessel protection detachments from navies in appropriate cases, but would remind Members that it is not a substitute for the basic anti-piracy measures recommended in the BMP.
RISK & CAPITAL MANAGEMENT
Risk and capital management have become an important focus of regulators and rating agencies alike in recent years. The Club has taken the issue of risk management seriously for some time within its loss prevention and ship inspection activities which represents the customer facing element of its risk management function. The development of the Individual Capital Assessment (ICA) regime by the UK Financial Services Authority, over five years ago, led to the Club improving its management of risk across the business and using the ICA model to inform decisions in areas such as investment policy and reinsurance purchase. Whilst the techniques are becoming increasingly more sophisticated the underlying rationale remains the same, to manage risk and capital effectively for the benefit of Members, given the requirements of regulators and rating agencies.
Central to managing risk across the business remains the quantitative and qualitative assessment of risk, which is focused on the Club’s internal risk model and the S&P rating model. Both of these models have been used for making key business decisions. The Club has now entered the Solvency 2 Internal Model Approval Process, which is the means by which the regulator will approve the Club’s approach to measuring its
own Solvency Capital Requirement (SCR) under Solvency 2. The further development of the Club’s own risk model to meet these more exacting requirements will be taking place during 2011. In addition to focusing on the Club’s insurance risks, the model will also provide a framework for one of the most important activities of an insurer, namely Asset - Liability Management, (ALM). ALM ensures that an insurer matches the risk profile of the assets (the investment portfolio) with its liabilities, thereby protecting the capital base against an adverse change in claims, investments or currencies. ALM alone cannot protect an insurer against all risks. In its Corporate Plan, the Club considers not only the strategic direction of the Club, but also through thorough risk analysis the Plan identifies scenarios or extreme events that could seriously disrupt the Club’s financial position.
The Club then considers the best way to mitigate these risks, some of which can be transferred through reinsurance, others through organisational processes and contingency plans. Finally, risks are also mitigated through holding a certain level of capital to meet solvency and regulatory requirements. Meeting regulatory capital standards is a minimum obligation, but the Club chooses to target a higher
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