This paper is part of a series of work by the CRO Forum under their Best Risk Management Practices initiative.The paper outlines important principles and considerations that should be part of best risk management practice for the management of liquidity risk within an insurance company. The primary focus of this paper is the management of liquidity risk where the company bears the risk, as opposed to the policyholder.
Over the past 3-4 years a tremendous amount of positive energy and resource has been expended in the name of improving the efficiency and effectiveness of the oversight of insurance entities, globally, by regulatory and supervisory bodies, industry associations and commentators alike. The CRO Forum is pleased at the pace and direction of the changes under consideration. However it has also become clear that in the course of the wider dialogue, confusion has sometimes arisen about the intended meaning about certain principles and elements of suggested implementation frameworks. Moreover, parallel discussions in the field of financial accounting have meant some terminology has dual meanings.
Thank you for your letter dated 3 June 2008 asking for our views on the European harmonisation of reporting formats. I am pleased to provide you with the CRO Forum answers on your specific questions. Concerning your first question; we agree that the suggested timetable should be in line with the Solvency II project. There are many good reasons for this. Firstly, the current framework differs across jurisdictions and the underlying data is not consistent as Members States apply different valuation bases. Therefore, using the current fragmented supervisory landscape as a starting point for a European wide reporting format would not be appropriate and we need the harmonization of principles that Solvency II brings.
It is obvious that the Standard Formula does not exhibit full risk sensitivity at every individual company level, as the sensitivity to risks is individually set e.g. through risk mitigation measures the company might have chosen. We welcome the steps taken in the framework directive to promote good risk management and want to encourage the Commission to appropriately reflect the diversity in risk exposure and risk profiles existing in the insurance industry. Solvency II should make use of data and expertise in the industry to the largest extent possible
but their views vary widely regarding how it will unfold and what excess mortality fi gures will result. Although analyses of past pandemics provide an insight into possible future scenarios, a simple extrapolation of statistics can be highly misleading. However, the 1918 Spanish fl u is often used as a basis for projecting the possible impact of a severe pandemic.
Supervisory Powers - further advice' We welcome the opportunity to comment on this draft advice. The CRO Forum believes it is key to have appropriate harmonisation of supervisory powers, next to an adequate solvency system.
As recent terrorist activities in major cities - notably, the 11 September 2001 attacks in the United States - have made strikingly clear, terrorism has developed into a threat that affects every aspect of society and knows no national boundaries. Although there is no internationally binding defi nition of terrorism, some aspects can be agreed on: it seeks to cause human suffering, to instil widespread fear, and to disrupt life and business. The insurance industry has responded to this evolving hazard, and is doing all in its power to manage the terrorism risk.
The CRO Forum companies have developed internal capital models, which they expect to be approved by the regulators as a basis for setting the level of target capital ('SCR'). The CRO Forum companies have also participated in QIS3.
We have been an active participant in the Solvency II discussions that have taken place before the publication of the Solvency II directive promoting a risk-based and economic approach. We have therefore published a number of own initiatives papers on issues covering the cost of capital approach to market value margin (MVM), diversification benefits, internal models and financial risk mitigation and has responded to CEIOPS consultation papers.
