“Risk Managers must try to talk about ‘the elephant in the room,’ enabling an open dialogue about business risks,” advised Swiss Re’s Chief Risk Officer, Raj Singh, as the reinsurer presented its new publication entitled “Establishing a pro-active risk management culture”.
Singh described Solvency II as the “best answer to the crisis for the insurance and reinsurance industry because it is based on economic principles.” Swiss Re noted that besides “quantitative elements, such as capital requirements, Solvency II provides guidance on qualitative aspects such as risk governance and transparency.”
Switzerland already took steps to modernize its insurance regulations in 2006, with a similar regime based on total balance sheet economic solvency and relying strongly on qualitative requirements.
Swiss Re also indicated 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, any discussion about the framework’s qualitative dimension has been largely eclipsed.
“However, as a recent survey conducted by the Institute of Insurance Economics at the University of St. Gallen shows, many insurance companies consider the softer, behavioral issues around establishing a sound risk management culture to be equally challenging when it comes to implementing Solvency II.”
Swiss Re’s report outlines its recommendations for risk management in relation to each of the main elements of the Solvency II framework directive: risk and capital modeling, governance as well as disclosure and transparency.
Singh commented: “As the financial crisis has shown, events that are not reflected in risk models can present the greatest danger. Models are powerful yet simplified reflections of reality. By setting out possible future states of the world in a disciplined way, risk managers should use scenarios to ‘think the unthinkable’. In fact, complementing the models with scenario thinking is the essence of sound risk management.”
Swiss Re also noted that 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. One solution Swiss Re uses is a “three-signature” approach that requires large transactions to be signed off by the underwriting, client management and risk management departments. The positioning of the Chief Risk Officer at the top of the organization is essential to drive such a risk management culture: it ensures that risk management is fully aware of the company’s overall risk appetite, applies risk limits accordingly and maintains independence of judgment.”
“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. Indeed, it can be argued that transparency is the major driver of the successful implementation of quantitative risk management and risk governance,” Singh concluded:
Source: Swiss Re
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