NU Online News Service, April 14, 4:18 p.m.EDT

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The importance of pre-emptive and independent risk managementfor insurers and reinsurers has been heightened by the currentfinancial crisis, according to a paper issued at the Chief RiskOfficer Forum.

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Titled "Insurance Risk Management Response to the FinancialCrisis," the report was based on contributions from a number ofreinsurance and insurance companies, said Swiss Re.

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According to the CRO Forum, the risk management approach for(re)insurers is one of several factors that regulators and insurersshould keep in mind when considering the lessons learned from thecrisis.

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Raj Singh, Swiss Re's chief risk officer, commented: "Thefinancial crisis has demonstrated the need for an integratedapproach to risk management and one that encourages risk managersto think in terms of scenarios. The crisis also reinforced the casefor Solvency II as a principle-based, economic, risk-sensitive andprudential approach."

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According to the report, regulators and governments in manycountries have launched initiatives to bolster financial stabilityand restore market confidence. While recognizing that theythemselves had not adequately appreciated the risks building up inthe financial system, most are reviewing their regulatory regimesto help identify and avert future crises.

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The paper stressed that it is crucial for the insurance industrythat regulators and governments succeed in their battle to restartthe world's financial markets.

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Success will require international cooperation and coordination,with group-level supervision and efficient capital management forglobal (re)insurance groups, according to the report.

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Any new regulation, it said, will need to take into account theinsurance industry's distinct business model, avoid creating marketdistortions, and offer clear incentives for sound risk and capitalmanagement.

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The paper summarizes the CRO Forum's views on the key elementsof effective risk management, the differences between insurance andbank approaches to risk management, and the importance ofeconomic-based group supervision for cross-border (re)insurers.

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It covers five major themes the CRO Forum considers to beadequate responses to the crisis. The themes, according to thepaper, have proved to work effectively for (re)insurers that havefollowed these principles and they should form the basis for anyconclusion to be drawn as lessons learned from the crisis.

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They are:

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o Integrated risk governance--(Re)insurers rely on sound andcomprehensive internal risk governance to respond effectively tochanging market conditions. The risk management function needs tobe pre-emptive, independent and empowered.

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o Risk models--While these are indispensable tools fordeveloping business, designing and managing products, valuingportfolios, gauging capital adequacy, and for regulatory purposes,they can never be a substitute for common sense, as they do havesignificant inherent limitations.

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o Liquidity risk management--The credit crisis is a sharpreminder of liquidity risk as distinct from risk to capitaladequacy. Liquidity risk management has to prepare for theunexpected and thus relies on scenario testing to anticipate theeffects of extreme situations. However, it is important to notethat liquidity risk of insurers is fundamentally different fromthat of banks.

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o Valuation and risk disclosure--Renewed market confidencerequires accurate valuation and the prompt disclosure of relevantrisk information. Market-consistent valuation of both assets andliabilities should become the principle that underpins financialinformation and prudential oversight in insurance. Properlyapplied, these would not aggravate pro-cyclicality.

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o Group supervision--The financial crisis emphasizes the needfor international cooperation among regulators to developgroup-level supervision, particularly through results-orientedsupervisory colleges for large and global insurance groups.

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The CRO Forum said it supports a principle- and economicrisk-based approach for the supervision of groups, which assessestheir consolidated risk exposure and capital position in line witheconomic reality. The efforts of the International Association ofInsurance Supervisors (IAIS) should be strengthened by introducingbinding standards that would accelerate regulatory convergence, CROadvised.

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