Wednesday, 31 August 2011

Think piece from CII - rethinking risk management (Solvency II angle)

In the context of the FSA's perceived wish to have more mathematicians in charge of Insurance company risk functions, it is always nice to wrap one's self in the comfort blanket of some views from the soft side of the fence.

This paper from Dr. Ashby, taking a sample of 20 risk management professionals (no mention of their backgrounds, which would have been handy in the context), is a look back over the causes of the credit crisis and how to negate such causes in future. It points at the following;
  • Consensus that inappropriate risk culture, poor risk communication and over-reliance on modelled risk assessment were significant contributing factors (both institutions and regulatory/ratings agencies highlighted). These are of course the kinds of aspects most difficult to attack without an appropriate remit and seniority (i.e CRO seat)
  • Recommends more of a balance "between modelling and judgement", to counter the increased focus on "objective measurement over effective management" - guessing the quota of pure risk versus actuarial-style in the 20 person sample was weighted towards my kind!
  • Fairly critical of risk functions for either alienating themselves from the business with a compliance-led approach, or for lacking the skills to communicate risk exposures
  • None of the sample agreed that Solvency II would lead to improvements in risk management.
  • Strangely highlights operational risk as an aspect of risk management "that does not lend [itself] to formal mathematical modelling" - couldn't agree less, and I'm not an actuary!
A worthy paper, good for benchmarking, and good for reassurance - well done to all involved.

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