Conning
“A
ny company, whether an insurer or not, must design a risk-reward profile it is comfortable with. This should be within the bounds of its risk tolerance and include both
the company’s own risk appetite and the need to comply with regulatory requirements.”
This is the opinion of Richard Urbach, managing director of quantitative finance at Conning. He believes insurers must grasp the importance of modelling to help them in developing an effective asset liability management (ALM) programme.
“Risk-reward profiles are developed from business decisions that the company makes. These will include decisions on the liability side through its insurance arm, and also the risks it takes on the asset side,” he says.
It is the interplay of these two sources of risk with management decisions
that forms the joint distribution of the risks and rewards inherent in an insurer’s business strategy, argues Urbach.
“This profile is a dynamic animal that moves through time,” he says.
“Everything is moving: the liabilities are moving and so are the assets. Your strategy has to embrace the fact that your profile is constantly in motion.”
This kind of modelling is becoming more commonplace throughout the
global insurance industry. This is especially the case in Europe, where the new Solvency II regime requires insurers to tighten up their internal risk management.
But, Urbach points out, modelling technology has been available for a
relatively long time and this renewed focus on risk management could be a case of too little, too late, for some companies.
“When the good times roll, people are just not very interested in this
kind of thing,” he says. “Then an event such as the financial crisis of 2008/09 comes along, and all of a sudden everyone becomes very interested in this technology. But it may be a bit late for some; they should have been interested in it back in 2006, because then they could have been confronted with the possibilities and had time to take appropriate action to mitigate the impact of such an event if they chose to do so.”
38 | INTELLIGENT INSURER | Spring 2012
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