NU Online News Service, March 16, 12:14 a.m. EST
The recession of 2008 has demonstrated tpat insurers understand their risks better than banks, an insurance executive advised at an industry conference.
John N. Molbeck Jr. president and chief executive officer of HCC Insurance Holdings Inc. made his remarks during a webcast yesterday of the proceedings of the World Insurance Forum in Bermuda.
The insurance industry is less at risk for failure than banks, he said, "because we understand our perimeters," adding that the major fault of banks is that they did not understand the extent of their liability, which led to their failure.
Banks, said Mr. Molbeck, are unlike insurers who understand what their liability is, what they need to insure, and the need to have adequate capital to cover those liabilities in the case of a loss.
His observation was part of a broad panel discussion about enterprise risk management
"Mr. Molbeck noted that in looking back to 2007, those individuals who were considered to be the most sophisticated in understanding risk were investment and commercial bankers. That no longer exists today. Understanding risk, he noted, is much more difficult than anyone can assume.
He was critical of American International Group, which he said thought it understood its financial risk as it did its insurance risks, but did not understand the "financial [side] as well as it thought."
The role of risk needs to be thoroughly understood and discussed within a company, he said, and it is the role of the CEO to be an active participant, leading the discussion about emerging risk.
There cannot, he observed, be too much reliance on models, saying, "people love models; they make us feel safe," but there is a constant "need to question assumptions."
John Charman, president and CEO of AXIS Capital Holdings Ltd., said the insurance industry has evolved from a point where it relied on luck to a point where a company "now makes informed decisions and takes the risk it is willing to assume."
This evolution in risk management has been driven by the adoption of enterprise risk management (ERM), which Mr. Charman said is "not a perfect solution," but is a "dynamic process" that has allowed AXIS to tailor its own standards to its business activity.
By taking diverse elements of risk, including insurance, operations and financial and forcing management to consider their impact on the company, the enterprise can control its risk and clearly define its appetite, said Mr. Charman.
However, he remarked that effective adoption of ERM requires a revolution in the thinking by a company that is not driven by a top-down approach but a commitment by the entire management of the company to examine and question its assumptions and decisions.
Mr. Charman said such thinking is imbedded into the culture of AXIS, but it could not be done without the commitment of the CEO and board chairman.
Companies will have to go through a transition and adopt best practices, ERM standards that have proven success, and those "laggards" who do not have the resources to hire the people needed to perform this task should "get out of the business and do something else," observed Mr. Charman.
On the issue of models, Stephen Catlin, CEO and deputy chairman of Catlin Group Ltd., said his company resisted the use of outside models for years, eventually to employ them. However, they still employ internal models as a way of verifying what is being viewed externally.
"I want external validation," remarked Mr. Charman, but he argued that the examination of risk needs to be broad because "a narrow band" of understanding "has historically been wrong."