1. This Guidance relates to the Rules on management and control of risk contained in Chapter 2. It has been prepared to assist directors of Insurers, their Auditors, and others concerned in applying those Rules.
2. The Rules in Chapter 2 require an Insurer to address specific areas of risk, as well as maintain a sound and effective risk management system. Insurers have some flexibility in their approach to these requirements.
3. This appendix provides some general comment on the objectives of the Rules, risk management and control mechanisms. It also provides specific comment on the following selected aspects of the five broad areas of risk identified in Rule 2.3, that are considered to be of particular relevance to Insurers:
a. Balance sheet risk components:
i. reserving risk;
ii. investment risk (including risks associated with the use of derivatives);
iii. underwriting risk;
iv. claims management risk;
v. product design and pricing risk; and
vi. liquidity management risk;
b. Credit quality risk;
c. Non-financial or operational risk components:
i. business continuity planning risk; and
ii. outsourcing risk;
d. Reinsurance risk; and
e. Group risk.
4. It is not the purpose of this appendix to provide guidance in areas that are common to many, if not all, Authorised Persons other than Insurers. The principal objective is to address areas that are of specific relevance to Insurers.
5. The procedures set out in this appendix do not constitute a checklist of necessary procedures. An Insurer cannot assume that implementing all of the procedures set out in this appendix will guarantee that the Insurer complies with the requirements to which it is subject.
6. Since this appendix is not intended to be prescriptive or exhaustive, it cannot be regarded as a substitute for reading the Rules themselves and taking professional advice. An Insurer should contact the Regulator if there are any areas which it would like to discuss further.