Demand for Sophisticated Risk Management Capabilities Increasing
To say the recent financial crisis was a crisis of risk management is undeniable: Bad bets were made on multiple levels, and their potential consequences were not foreseen until it was too late. Also undeniable is that the senior executives of many financial services enterprises, including insurance companies, now must rethink how they manage risk and, in particular, how they use predictive modeling to justify the risks that they take.
But risk models are merely tools that can be used or abused, and their failure to predict the crisis largely is attributable to the assumptions, rationalizations and just plain denial on the part of those using them. It's not as if the math suddenly ceased to work. Rather, the credit/financial crisis has shown not only that insurers must better manage the interaction of the art and science of risk management, but that risk modeling -- and the increasingly sophisticated technology that supports it -- is more important than ever.
As the economy slowly emerges from the crisis, insurers realize that they need a clearer, more current view of their risk exposures, including access to both accurate source information and more comprehensive risk modeling. And while insurers feel the need for these capabilities internally, regulators and rating agencies also are increasingly demanding more granular reporting. One result is that many insurers are playing catch-up and depending on external sources of risk management capabilities.
"With the current demand for risk management globally across industries, we decided to separate risk management as a service line," says Edward Grau, a New York-based senior executive in Accenture's financial services risk management practice, which was launched in February 2010. While the Accenture unit serves many industries, Grau says, insurers are among the companies with an increased seriousness about risk expertise and technology. "We've been involved in several engagements [with insurance companies] over the last six months," he reports.
Though insurers are risk managers by nature, their performance during the crisis exposed a need to improve in that regard, Grau adds. "In the recent credit crisis we've seen insurance company asset portfolios fall by as much as a third," he notes. "This has caused a lot of new thinking in the insurance space."
Even before the crisis, according to Grau, many insurers were challenged by changing regulatory demands driven by a shift to economic capital accounting and the implications of emerging global reporting standards, such as IFRS and Solvency II, as well as by the potential of technology itself. "Regulators are starting to require demonstrated control of position, of valuation, of asset and liability coverage, and capital adequacy," he says.
Answering Regulatory Demands
Regulatory demands were among the reasons that Chicago-based The Warranty Group, an underwriter and administrator of service contracts and related benefits, sought a robust platform for accounting and monitoring risk exposure in the first half of 2008, according to Jim Krygier, the firm's assistant VP and de facto CIO. "We were looking for technology that we could implement for daily transparency on our portfolio, which is multi-asset, multi-currency and global," he reports. "From an insurance point of view, we have many regulatory constraints and multiple reporting bases, including U.S. GAAP, U.K. GAAP, statutory, tax and, because our parent company is a Canadian entity, we'll be rolling out IFRS this year." The Warranty Group is a subsidiary of Toronto-based Onex Corp.
It was in the second half of 2008, when the credit crisis developed, that The Warranty Group ($4.9 billion in assets) realized that it lacked the transparency it needed, Krygier recalls. "As the days drew on during the crisis, our board was asking about our concentration of exposure, but we didn't have the robustness to say, 'This is last night's price,' " he relates. "By the time we established our prior portfolio price, it had already changed. We were constantly playing catch-up."
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio
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