The development of the industry, especially the current insurance services industry that is increasingly dynamic encourages insurance companies to improve their performance in order to maintain their sustainability as well as to grow and develop. In order to face the increasingly high market competition, companies are required to make various changes and improvements to all their components. Improvements are made firstly by measuring and evaluating the existing systems or management.
Insurance companies that can maintain their sustainability in running a business are companies that can properly implement assurance management that involves internal parties such as risk management, managers and internal audits (SPI). Insurance business risk management becomes an absolute need to control risk in the insurance closing of an insurance object. Underwriting analysis that implements prudential principles can reduce the incidence of defaults which cause claims and other risks. Various ways of risk management can be carried out by companies in accordance with their business processes and business characteristics.
Risk management is usually aimed at controlling the risks to be faced by companies which include strategic risk, operational risk, business risk, financial risk and external risk. This aggregate risk grouping for each company can differ according to the business processes and business characteristics. In general, the risks commonly faced by companies engaged in the field of insurance/credit guarantee can be divided into two (2) types of risk based on the types of business activity, i.e. non-transactional risk and transactional risk.
Non-transactional risk management is applied to manage risks that are not involved in transactional activities such as strategic risk, business risk, operational risk, financial risk, regulatory risk, legal risk and reputation risk. This non-transactional risk management is a form of the implementation of Enterprise Risk Management that covers all risks faced by an enterprise but does not cover transactional activities. Risk management in non-transactional activities is conducted by an officer called Risk Contact Person (RCP). The media that can be used for risk reporting by RCP can be in a form of an interactive website which is effective and efficient for companies having branch offices widespread in Indonesia.
On the other hand, transactional activity is an activity that involves a company and one (1) person/party or more under a legal contract/law where there is transfer of money and non-money (goods/services) between the parties involved. Activities that include transactional activities in insurance/credit guarantee business include: acceptance/business closing activities, claims settlement, procurement of goods & services and investment.
Therefore, in managing transactional risk, the four eyes principles method is implemented with the help of the risk management unit which plays a role in providing risk review during the decision-making process. The focus of the implementation of the four eyes principles is carried out by a Committee, through review and approval of transactions, whether for the closure of credit insurance/suretyship and other transactions (settlement of claims and investments) made by at least 2 (two) persons having decision-making authority, one (1) of whom is from the operational/business/supporting unit (for investment activity), while the other one (1) is from the risk management unit, also known as Risk Officer (RO). The role of the representative from the risk management unit in assisting the Committee is non-binding in nature and they only provide risk recommendations and review for proper risk management. The focus of the implementation of four eyes principles (FEP) in the risk management for the time being in insurance/credit guarantee companies that have suretyship products (including customs bond and trade credit insurance) and credit insurance (commercial and micro credit) covers the following:
- Operational/business transactions on Suretyship and Credit Insurance products. FEP targets in these business transactions are optional in nature while the focus on the ceiling value/guarantee value is relatively big or at the level of business transaction expected to require more intense risk management through the decision-making mechanism of the closing business committee in both the Head Office and the Branch Office.
- Transactions on procurement of goods and services. The FEP is implemented by establishing Committee of Procurement of Goods and Services where there are at least two (2) persons, i.e. one (1) person from the Risk Management (RO) unit and one (1) person from HR Division or with an addition of one (1) person from a related work unit based on the company’s needs. The committee for procurement of goods and services may work at the head office or branch office in accordance with the company’s needs and in compliance with internal and external rules/regulations.
- Transactions on Investment activities. Implementation of FEP is conducted through Investment Committee consisting of at least two (2) persons, one of whom is the Investment Committee member from the risk management unit (RO) and the other one (1) is from a related investment unit.
The Purpose of the Implementation of the Four Eyes Principles
- The implementation of the four eyes principles not only aims to manage risk but also to ensure that the insurance closing/acceptance can run in accordance with the company’s policies and in compliance with the government regulations.
- As a method of risk management, especially in the process of insurance acceptance in accordance with the prudential principles that can reduce the risk of claims, financial risks, legal risks and other risks which adversely affect the company.
- As a means for the management to provide assurance in the implementation of policies in the business against adverse risks.
By: Mulyono, SE, MM, CRMP, BCMCP