What a time to be a chief risk officer in the insurance industry. Five years on from the start of the financial crisis and the global economy is still struggling to recover. Indeed, the double dip recession in advanced economies is spilling over now into many of the emerging markets of Asia, Latin America and the Middle East, hampering growth there.
In Europe, according to the OECD, more needs to be done to tackle negative links in the euro area between public finances, bank solvency and risks that any country may have to leave the Euro. “In the long run, this requires a fully-fledged banking union with fiscal backstops. Recapitalisation of banks should be undertaken where necessary,” the OECD said.
Insurance CROs could be forgiven for wincing a little at that statement. Innocent bystanders to the near collapse of the banking system, insurers now have to contend with the fall-out resulting from banks’ hubris on two fronts.
First they have to reconcile the meagre returns on offer from an emasculated investment market with the risks their organisation takes on the underwriting side.
Second, in what is proving to be a complex, costly and time consuming challenge, CROs have to manage their compliance with increased, ever changing solvency regulation, particularly with Solvency II.
And remember, this is regulation whose demands have been intensified because policymakers continue to see insurance through the lens of banking.
As Swiss Re’s CRO David Cole writes in these pages, commenting on the proposed Global Systemically Important Insurers listing, “Regulators need to be aware that measures which are intended to limit the impact of a sudden exit of a large (re)insurance player may inadvertently limit insurers’ ability to supply capital to the economy”.
Domestic US insurance groups don’t have it any easier. Referencing ORSA (the Own Risk & Solvency Assessment proposal), Michael Mahaffey, Nationwide’s CRO, writes in his op-ed: “To date, the companies subject to federal supervision are largely living with a banking risk and capital model transposed onto the insurance industry. It is the proverbial square peg in a round hole.”
Investment management in a world of uncertainty, plus compliance with – in the case of Solvency II — incomplete regulation: that’s not the end of it for today’s CRO. An essential part of the CRO’s job is to analyse his/her company’s strategy through the prism of enterprise risk management.
“High quality returns are not the result of good luck or friendly breezes, but rather derive from a set of well-reasoned and measurable processes that are capable of being replicated,” as XL Group CRO Jacob Rosengarten points out in his paper.
Enterprise risk management must take so much into account in today’s global insurance groups, in addition to challenges around growth and capital risk management.
The World Economic Forum just released its Global Risk Report and it highlights the diverse socio-economic and environmental risks that business leaders believe could have the biggest impact. Major systemic financial failure and water supply crises are at the top. In the ‘most likely’ ranking, severe income disparity and chronic fiscal imbalances are placed #1 and #2.
But what the report really highlights is just how interconnected different risks are today — and how policymakers could learn something from the risk professionals. “In the corporate world a lot of progress has been made in risk management practice in terms of ERM,” Zurich Group CRO Axel Lehmann said at the report launch. “Global risks don’t stop at national borders they are cross country, cross regional, inter-regional. Like corporations, countries need to act on these risks, sharpen their thinking on risk management.”
I hope you enjoy reading CRO Risk Forum 2013 – and that it helps sharpen your thinking on risk management.
CRO Risk Forum 2013 articles - click on the headlines to view
Global systemically important insurers – The importance of being relevant
David Cole, CRO of Swiss Re, warns that proposals to list global systemically important insurers could have unintended consequences enterprise risk management
Enterprise risk management – In search of a pitch perfect process
Talent and a sound process are the keys to successful risk management, says Jacob Rosengarten, CRO of XL Solvency II
Solvency II – Raising the stakes on Solvency II
Hannover Re CRO Eberhard Mueller fears that if regulators keep raising the Solvency II bar they could destroy any value already created by the framework
Enterprise risk management – Thinking inside the box
Risk professionals are trained to think about the risks of others. Sometimes they need help to think about their own risk says Robb Canning, CRO at Guy Carpenter
North America perspective – US insurers prepare for a risky New Year
Michael Mahaffey, CRO of Nationwide, reflects on what kept CROs busy in 2012
Europe Perspective – A CRO with Euro vision
Mark McCausland, CRO of Ace European Group, has oversight of 28 diverse EMEA markets
Capital management – Why internal models matter more than ever
Banks’ enthusiasm for internal models has dimmed. But Philippe Trainar, CRO of Scor, says they are a critical management tool in the (re)insurance industry
Culture club — a different approach to ERM
Kiln CRO Andrew Hitchcox says that a company’s overall culture shapes the way it approaches risk
Emerging risks – Global risks — the writing’s on the wall
Black swans are hiding in plain sight, according to the latest Global Risks Report from the World Economic Forum. Garry Booth reports
Asset risk management – Dealing with a silo mentality
How should insurers develop their asset management risk structure to avoid a silo approach and achieve lower capital charges? Jostein Amdal, CRO at the Norwegian insurer Gjensidige Forsikring explains