NU Online News Service, May 18, 2:50 p.m. EDT
While good governance, modeling and disclosure are vital to insurance risk management, the risk manager also has a pivotal role to play in creating a proactive and preemptive risk management culture, Swiss Re said.
In its new report released today, "Establishing a Proactive Risk Management Culture," Swiss Re outlined its recommendations for risk management in relation to each of the main elements of the Solvency II framework directive: risk and capital modeling, governance, and disclosure and transparency.
According to the report, companies need to fully utilize risk management, recognizing the need to manage reality and not models.
Models do not make decisions, the report notes, people do.
Companies should also use risk scenarios to "think the unthinkable," according to Swiss Re, as well as to pay attention to liquidity issues and distinguish between roles and responsibilities of those in the organization.
"It is vital that responsibility for the risk lies with the business, and that risk management plays the role of controlling the risk, seeking to ensure the risk assumptions are clear and that it is in line with the risk appetite of the business," the report states.
Swiss Re's chief risk officer, Raj Singh, said models are powerful, yet simplified, reflections of reality, and he added sound risk management involves complementing the models with scenario thinking.
He added, "As the financial crisis has shown, events that are not reflected in risk models can present the greatest danger."
Swiss Re said it sees insurance risk managers as an independent line of defense, ensuring that the risk-reward balance is fully evaluated and that all risks are sufficiently understood by the business.
The positioning of the chief risk officer at the top of the organization is essential to drive a risk management culture, Swiss Re said.
Swiss Re said it uses a "three-signature" approach, requiring that large transactions be signed off by the underwriting, client management and risk management departments.
Mr. Singh said, "When it comes to decision-making, risk managers must be aware of the forces driving the deal, including how the risk taker is remunerated and incentivized. Therefore, transparency is a non-negotiable quality of the entire risk management process."
He added that it can be argued that "transparency is the major driver of the successful implementation of quantitative risk management and risk governance."
Mr. Singh pointed out that Solvency II, a set of regulatory requirements for insurers in the European Union going into effect late next year, provides guidance on qualitative aspects such as risk governance and transparency.
Swiss Re said that while the recent debate about Solvency II has focused mainly on concerns that supervisors would overreact to the financial crisis by introducing excessively conservative capital requirements, discussions about the framework's qualitative dimension have been largely eclipsed.
However, as a recent survey conducted by the Institute of Insurance Economics at the University of St. Gallen shows, many insurers consider the softer, behavioral issues around establishing a sound risk management culture to be equally challenging when it comes to implementing Solvency II.
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