A crisis, what’s the use,what’s the purpose?

Impact of the Crisison Risk Management and Regulation

Raj SinghMember of the Executive Committee, Swiss Re

Monte Carlo, 8 September 09

Agenda

RVS Monte Carlo 2009Raj Singh

Risk management lessons learned

Evolving regulatory landscape

Looking forward

Slide 2

Insurance industry withstood the crisis, but was not unscathed

Massive asset write-downs resulting in realised and unrealised losses

Ratings downgrades

Liquidity risk surprises

Complex products left unhedged

Back-up funds tapped

Dilutive capital raised

Government bailouts

Balance sheets adversely affected…

…last-resort solutions relied upon

Slide 3

RVS Monte Carlo 2009Raj Singh

Crisis revealed important deficiencies with respect to current risk management practices

Score-card calls for independent and pre-emptive risk management

Assessment Areas for improvement

Risk appetite C+

Risk appetite an abstract concept, designed to fit a strategy

Strategy to be formulated within the bounds of clearly defined risk appetite Risk appetite to be clearly defined across multiple management metrics

Governance structure B

Risk function lacks full buy-in at a high level

Direct constraints on risk taking through risk limits and veto powers CRO to report to CEO to maintain independence and elevate risk importance

Reporting C

Reporting often inadequate and serving as a lagging indicator

Timely and pre-emptive risk reports to appropriate audience (BoD, CEO)

Reports to be comprehensive of ALL risks

Risk models C-

Models need continuous improvements

Risk models to be embedded in risk governance and not developed in isolation

Models need to be complemented by sound business judgment

Slide 4

Agenda

RVS Monte Carlo 2009Raj Singh

Risk management lessons learned

Evolving regulatory landscape

Looking forward

Slide 5

Stricter rules on capital requirements

Liquidity risk management standards

Restricted compensation structures

Group supervision and colleges

Systemic risk regulation

OTC derivative structures

Hedge fund regulation

Relaunch securitisation markets

Changes in “fair value” accounting

Providing capital and market liquidity

– Nationalisation

– Support to troubled institutions

– Set-up of troubled asset funds

– Pumping liquidity into markets

Encouragement of reduction in leverage and increases in capital

Short-selling rules

Regulatory risks accelerate and new ones emerge as the crisis unfolds

Source: Swiss Re, Oliver Wyman

Regulatory costs will increase as the industry undergoes structural changes

Slide 6

RVS Monte Carlo 2009Raj Singh

Short term governments actions… …Longer term regulatory initiatives

Crisis reinforces the case for Solvency II

Market consistent valuation Treatment of own funds Group supervision SCR calibration and

calculation

Treatment of non-proportional

Counterparty credit risk NatCat scenarios Geographic diversification

Principles of approved Directive framework are appropriately economic and risk-based

Challenges foreseen in implementation as national interests surface

Slide 7

RVS Monte Carlo 2009Raj Singh

Key imperative for insurers and reinsurers alike to secure appropriate recognition of risk mitigation techniques

Reinsurance specific issuesIndustry general concerns

Insurance industry to raise its voice, as regulatory environment evolves

Emphasise (re)insurance specificities

Differentiate the business model of (re)insurance from banks

Promote sound risk and capital management

Maintain market access and level playing field

Achieve accounting convergence

Key objectives for the industry

Establish economic and risk-based regulatory framework

Enforce market-consistent valuation and avoid pro-cyclicality

Secure governments’ commitments to open trade and fair competition

Slide 8

RVS Monte Carlo 2009Raj Singh

Insurance and reinsurance are part of the solution, and not sources of the crisis

Agenda

RVS Monte Carlo 2009Raj Singh

Risk management lessons learned

Evolving regulatory landscape

Looking forward

Slide 9

Key areas of focus going forward

Ensure independence of risk management function

Rethink risk governance framework to be more pre-emptive

Enhance group supervision and role of supervisory colleges

Encourage economic and risk-based solvency regimes

Avert protectionist and isolated government behaviour

Make the case for insurance, as it is part of the solutionSlide 10

RVS Monte Carlo 2009Raj Singh