Three lines of defence model now used in 95% of APAC insurers

Ninety-five percent of Asia-Pacific (APAC) insurance risk managers have adopted a formal three lines of defense (LoD) model, according to new research.

Account firm EY said CROs surveyed in their annual APAC Insurance CRO Survey acknowledged the three-LoD model to work well in design, but the model presented difficulties during its implementation in practice.

A majority of CROs identified that the greatest challenge with the three-LoD model is delineating the roles between the first and second line. 
In particular, CROs recognise the need to strengthen their first line and ensure their risk ownership and accountability.

One CRO commented: “The three-LoD model is giving a false sense of security to the board — if there is a failure in the first line, there is a failure in the second line. Then it means there is a failure in all the three lines. In that sense, strengthening the first line is the main challenge.”

Despite these challenges, CROs are already actively thinking about or starting to implement ways to enhance the operating effectiveness of the three- LoD model including:

• Training provided through workshops to enhance risk understanding and awareness with a desire to promote a risk management culture across the insurer.
• A line 1.5 function is created where the second line is actively working to develop first line’s capability to own their risks. CROs see that the line 1.5 function would eventually be phased out, allowing the first line to operate independently, and the second line to be a challenge and review function over risks. 

• Performance assessment is linked to the responsibilities of day-to-day activities in risk management. Some insurers indicated that they are introducing risk management indicators 
in the first line as part of their performance appraisal system.