Financial Crisis: Risk Management Responses

The financial crisis has demonstrated the importance of pre-emptive and independent risk management approaches for (re)insurance companies. This is just one of several factors that regulators and insurers should bear in mind when considering the lessons learned from the crisis, according to a new paper issued by the Chief Risk Officer Forum (CRO Forum).

Regulatory regimes are under review in the wake of the financial crisis as regulators seek to bolster financial stability and avoid a repeat of the problems that led to the current situation.

New regulations should take account of the insurance industry’s distinct business model and encourage the adoption of the most effective practices in risk management, said the CRO Forum. In addition, it backs the introduction of economic risk-based, prudential regimes and effective group supervision for large cross-border (re)insurance companies, reflecting the global nature of their business.

“The financial crisis has demonstrated the need for an integrated approach to risk management and one that encourages risk managers to think in terms of scenarios,” said Raj Singh, Swiss Re’s Chief Risk Officer. “The crisis also reinforced the case for Solvency II as a principle-based, economic and risk-sensitive, prudential approach.”
Following are the key elements of effective risk management as suggested by the CRO Forum:

Integrated risk governance

The risk management function needs to be independent and empowered to build a genuinely risk-aware culture in each organisation, by clearly articulating and monitoring the company’s risk tolerance.

Risk models

These are indispensable tools for developing business and gauging capital adequacy. They need to be embedded in the risk governance framework and be complemented by sound management judgement.

Liquidity risk management

Liquidity risk management is distinct from capital adequacy and has to prepare for the unexpected and thus relies on scenario testing. However, it is important to note that liquidity risk of insurers is fundamentally different from that of banks.

Valuation and risk disclosure

Market-consistent valuation of both assets and liabilities should become the principle that underpins financial information and prudential oversight in insurance. Properly applied, they would not aggravate procyclicality.

Group supervision

There is a need for international cooperation among regulators to develop group-level supervision, particularly through results-oriented supervisory colleges for global insurance groups. The IAIS (International Association of Insurance Supervisors) should be strengthened to accelerate international regulatory convergence.

To see all the CRO Forum’s recommendations, you can download the paper here.

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