The more optimistic economic forecasters suggest that we may have reached the beginning
of the end of the global financial crisis. However, no one is saying yet that the turbulence is over.
The insurance sector faces stiff head winds—earnings pressure, access to capital, investment volatility,
and additional ratings downgrades.
By Robb Luck and Chris Karow
Perhaps even more challenging is the passage ahead, beyond
the crisis. The emerging questions are what the insurance
industry is learning from the crisis and how it will incorporate those lessons into new enterprise risk management
(ERM) approaches. There will be increasing concern from
many constituents—from board members to employees and
stockholders—as to whether companies will be better prepared than before to manage economic volatility, market
shocks, and new risks that are underestimated or not even
on the radar screen today.
We would like to provide some insights about risk management that companies can make use of as they look to the
future and some suggestions as to the role the actuarial department can play in implementing change. As unsettling as
the past 18 months have been, they have provided actionable
lessons to insurers about better integrating risk management
into their businesses. In fact, insurance companies that are
well-managed and that learn from the recent past and take
corrective action should be able to thrive in the future.
For several years prior to the global credit crisis and recession,
financial services firms worked hard to build their risk management programs and processes. In fact, there was general
agreement that strong risk management was a fundamental
business process and a competitive necessity, particularly for
insurance companies that make their money on risk-reward
business decisions. Today, of course, there’s significant scrutiny about how effective ERM has been, and important questions are being raised:
■■ Were appropriate risk management processes and metrics created but not integrated forcefully enough into decision-making? Did companies effectively define and then
manage within their risk appetite, tolerances, and limits?
If they did, were risk management policies used in evaluating new products, particularly those with complex features and inherent volatility? Did companies pay enough
attention to the upward trajectory of their aggregate risk
■■ Did companies base too much of their decision-making
about product design and capital deployment on retrospective analysis of generally positive and smooth market performance? Did they adequately model and stress-test possible
future worst-case scenarios?
■■ Did actuarial departments provide the right reports
and models, but not explain them adequately to decision-makers? Were the results coming out of the actuarial “black
boxes” not translated clearly and bluntly enough to mitigate
the impact of the unfolding crisis?
■■ What and when did companies know about the effectiveness of their hedging strategies and the impacts of those
strategies on their capital and solvency levels?