Risk managers as trusted and influential business partners

Good governance, modelling and disclosure are pivotal for insurance risk management. But the key ingredient in this mix is the sound judgement of strong risk managers. Their job is to create a proactive and pre-emptive risk management culture that enables disciplined risk-taking. Swiss Re’s new report, entitled “Establishing a pro-active risk management culture,” explores how risk managers can become influential and trusted partners of the business and why this is important. Noteworthy is the fact that the upcoming regulatory framework for the European insurance sector, Solvency II, will encourage the adoption of many of the risk management practices advocated by the report.

Models do not make decisions, people do

One of the publication’s recommendations concerns the use of modelling when making risk decisions. Models, although indispensable tools, are “simplified and imperfect reflections of reality and should not be used outside their domains of validity,” the report says. It makes the point that the financial crisis has underlined the need for ongoing reviews of models’ parameters to ensure their effectiveness. The writers go on to say that, at the end of the day, it is not models that make decisions but people. “Models are there to set direction and structure a discussion on assumptions and unchallenged judgements,” they conclude, and cannot be a substitute for sound decision-making by risk management professionals.

Thinking the unthinkable

The report’s writers also point to the human tendency to underplay the level of risk represented by rare events that have not occurred in recent history. To counter this, financial institutions need to take all eventualities into account when forging an approach to risk management, a stance they describe as “using scenarios to think the unthinkable.”

Change in risk management culture

The one recommendation that arguably underpins all others in the report relates to the necessity for a behavioural change on the part of risk managers. The latter cannot exercise their proper function by being mere documenters of events and decisions made. On the contrary, they need to speak up in advance and acknowledge “the elephant in the room, the unspoken issue that other participants, out of respect for authority, are choosing to ignore.”

Three-signature aproach

To embed such a change in a company’s risk management culture, Swiss Re ensures that insurance risk managers are an independent line of defence, ensuring that the risk-reward balance is fully evaluated and that all risks are sufficiently understood by the business and top management.To this end, the report says, Swiss Re employs a “three signature” approach, requiring that large transactions are signed off by the underwriting, client management and risk management departments. The positioning of the Chief Risk Officer at the top table of the organisation, is the enabler and driver of such a risk management culture.

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