A national Canadian lender re-adjusts its lending strategy and practices based on managing and transferring its Operational Risk in order to gain market share with respect to certain geographies/demographics. This included a complete re-structuring of its insurance products, which had an average Insurance Basis Risk* of over 60%.
Challenge
Management and the Board of Directors of a national Canadian lender were disturbed by the events of the Fort McMurray wildfire, which was Canada’s costliest natural disaster causing over $3.5 billion worth of damages, and which affected their mortgage portfolio.
Discovery
Through our analysis, we came to the conclusion that the lender had several initiatives it needed to adopt in order to form a strong ‘3 lines of defense’ system against its operational risks, of which insurance was the 2nd line of defense. Such initiatives ranged from re-arranging indemnity and insurance clauses within its contractual obligations, to adopting certain internal controls, to transforming its existing insurance into an Operational Risk Swap.
Impact
- The lender is now able to associate, and update, certain risk premiums to specific geographies and engage in ‘smarter’ lending vis a vis peers; This is set to maximize the lender’s risk adjusted returns and enable ‘above-market’ growth with respect to certain geographies/demographics.
- Insurance Basis Risk dropped below 10% and the lender is much better protected against CAT events.
- Six figure cost savings were achieved simply through the appointment of a new broker of insurance, and more cost savings were achieved through the re-structuring of Insurance.
- The lender maintains Insurance Basis Risk to a minimum through ongoing advice and quarterly updates on operational risk management and insurance.
*Insurance Basis Risk: probability of non-payment or delay in payment of Insurance.