Note 3 – Management of risk
The Association is governed by the Board of Directors which drives decision making within the Association from Board level through to operational decision making within the Managers. The Board considers the risk that the Association is prepared to accept in its ordinary course of activity and this is used to develop strategy and decision making. The Board is supported in its management of risk and decision making by a number of sub committees, being:
1. The Ship and Membership Quality Committee which ensures the quality of Association’s membership thereby managing insurance and credit risk.
2. The Strategy Committee which assists the Board in formulating strategic direction across the business including risk, investment and reinsurance strategy.
3. The Audit and Risk Committee which considers the Business Risk Log and directs internal audit effort. 4. The IPIR Board which assists the Board in managing the investment portfolio of the Association.
In addition further committees have been established to support operational decision making each of which report to the Audit and Risk Committee, being:
1. The Reinsurance Committee which considers the optimal reinsurance structure for the Association and the security of the counterparties to the programme.
2. The Reserving Committee which considers appropriate provision against unpaid claims.
3. The Finance Committee which considers the financial position of the Association including the risk of counterparty default.
The Association is focussed on the identification and management of potential risks. This covers all aspects of risk management including that to which the Association is exposed through its core activity as a provider of insurance services, and the broader range of risks. The key areas of risk impairing the Association can be classified as follows:
1. Insurance risk – incorporating underwriting and reserving risk 2. Market risk – incorporating investment risk, interest rate risk and currency rate risk 3. Credit risk – being the risk that a counterparty is unable to pay amounts in full when due 4. Liquidity risk – being the risk that cash may not be available to pay obligations as they fall due 5. Operational risk – being the risk of failure of internal processes or controls
In order to manage these risks, the Association has continued to develop and review the internal and external governance frameworks through the Individual Capital Assessment (“ICA”) and through the continuous preparation for Solvency 2.
The Board and Managers has sought to establish and embed risk management procedures within the business through a compliance manual, an internal quality management system and a risk management forum which considers and logs potential risks and how they are to be managed. The Board monitors the development and operation of risk management policies and controls in place to mitigate risk through a governance structure which includes an internal audit function and various committees noted above.
(a) Insurance Risk The Association’s exposure to insurance risk is initiated by the underwriting process and incorporates the possibility that an insured event occurs, leading to a claim on the Association from a Member. The risk is managed by the underwriting process, acquisition of reinsurance cover, cover provided by the International Group Pooling Agreement, the management of claims cost and the reserving process.
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