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New Swiss Re report shows how risk managers can shape insurers?

18 May 2010 Swiss Re

Risk management culture in line with Solvency II

Against the backdrop of the upcoming regulatory framework in Europe – Solvency II – Swiss Re detailed key learnings today on how insurance risk managers can shape their companies’ risk management culture in the post-crisis world.

"Risk Managers must try to talk about 'the elephant in the room', enabling an open dialogue about business risks," said Swiss Re’s Chief Risk Officer, Raj Singh, today, as the company presented its new publication entitled "Establishing a pro-active risk management culture".

According to Raj Singh, Solvency II is the best answer to the crisis for the insurance and reinsurance industry because it is based on economic principles. 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 modernise its insurance regulations in 2006 with a similar regime based on total balance sheet economic solvency and relying strongly on qualitative requirements.

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 (I·VW-HSG) shows, many insurance companies consider the softer, behavioural issues around establishing a sound risk management culture to be equally challenging when it comes to implementing Solvency II.

"Risk managers should use scenarios to think the unthinkable"
In its new report, Swiss Re outlines its recommendations for risk management in relation to each of the main elements of the Solvency II framework directive: risk and capital modelling,
governance as well as disclosure and transparency.

Raj 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."

The risk manager: an independent line of defence
Swiss Re also sees insurance risk managers as an independent line of defence, 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 organisation 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 judgement.

Raj Singh concluded: "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 incentivised. 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."

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