CRO Forum response to the financial crisis
The CRO Forum's views on the consequences for Enterprise Risk Management and regulation in the insurance industry.
Internal Model Myths
For a long time, many (re)insurance companies have realized the need for risk-based valuations and solvency capital measurement and have started developing internal economic capital models which suit their needs. This is without prompting from regulators and rating agencies. Why? Such models provide a common measurement basis across all risks (e.g. same methodology, time horizon, risk measure, level of confidence, etc.) and are a powerful tool for strategic decision-making, for example in capital allocation and pricing.
Press release on Solvency II
The Forum strongly believes the directive represents an important step toward implementing an advanced supervisory and solvency framework which will help strengthen the European insurance industry. The Forum now urges the European Commission to introduce clear and effective implementing measures that will deliver the directive's basic principles.
Internal Model Admissibility
Internal models should reflect the nature, scale and complexity of the underlying businesses; they should be proportional in sophistication to the materiality of the risks they cover. Materiality levels should be determined by stakeholders based on the model's purpose. Practical considerations for models include usability, reliability, timeliness, process effectiveness, systems and cost efficiency. There should be an acceptable tradeoff between accuracy and the various practical constraints.
Operational Risk Management
Further, European supervisors considered the causes of failures (and near-failures) of a number of insurers and their analysis showed that the causes were mostly associated with inappropriate risk decisions resulting from underlying internal failures rather than inadequate capitalisation per se.
Calibration Principles
The Solvency II standard formula to calculate a company's Solvency Capital Requirement should present a balancing act between various targets such as simplicity, risk sensitivity and robustness. The CRO Forum believes the main principles of the current standard formula, namely to asses the sensitivity with respect to all material risk factors and to aggregate capital requirements allowing for diversification, are appropriate for this purpose and moreover set incentives towards risk mitigation strategies.
Internal models benchmark study
This presentation is based on research (Internal Models Benchmarking Study 2008) carried out on behalf of the Chief Risk Officer Forum by Oliver Wyman.
Addressing the pro-cyclical nature of Solvency II
Risk capital charges in the Solvency II context reflect the 99.5% quantile on a 1-year horizon. The consistent application of risk capital charges in Solvency II to all sources of risk is imperative. Inconsistent application of risk charges creates perverse incentives for certain asset classes or insurance products.
Public risk discl. under Solvency II
as a basis for discussion on the implementing measures for articles 50-55 of the EU Solvency II Draft Directive. The CRO Forum advocates a principles-based approach: Section B of this paper establishes five main principles for public risk disclosure which should be adhered to by all undertakings.
ERI – Critical Information Infrastructure
The Emerging Risks Initiative of the Chief Risk Officers Forum is pleased to announce the publication of a new position paper called Critical Information Infrastructure. In industrialised societies, computers are interconnected to form a complex [...]