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Navigating The Storm

Having attended the fifth Chief Risk Officers (CRO) Assembly in Switzerland at the turn of the year, James Portelli provides an overview of key messages delivered by some of the leading risk management guardians of the global insurance industry.

Given the current economic climate, it is not surprising that the Chief Risk Officers (CRO) Forum chose “Navigating the Storm” as the title for this year’s CRO Assembly. The CRO Forum was formed in 2004 and comprises chief risk officers from major European insurance companies and financial conglomerates with the aim of developing and promoting industry best practices in risk management. The fifth CRO Assembly was organised under the auspices of the Geneva Association which, in itself, is a unique organisation formed by the CEOs of some of the most influential insurance companies/groups internationally. Swiss Reinsurance Company acted as hosts this year and the event was held at Swiss Re’s Centre for Global Dialogue in Rüschlikon, Switzerland.

The first keynote speech, delivered by Curtis Mewbourne, managing director at PIMCO, provided a macro update on the economic crisis, explaining what PIMCO coined the “New Normal” (N₂). Mewbourne outlined the economic events leading up to the crisis including: “shadow-banking” activities, excessive debt creation, and balance sheet inflation. In an economy that is increasingly globalised, it becomes very difficult to predict recovery on a set of essentially heterogeneous economies. Certainly the silver lining, as world economies emerge from this crisis, will include greater regulation of shadow-banking (ie derivatives, swaps, off-balance sheet transactions etc.), deleveraging of balance sheets, and a greater focus and specialisation by the various financial institutions on their core activities. During ensuing discussion, Klaus Otto Bick, CRO at Allianz Global reiterated that the “New Normal” will inevitably necessitate better understanding of risk, operating with greater transparency and building of trust as operational pre-requisites.

The second and third keynote presentations on the first day, by the Swiss Re and Zurich Financial Services CROs, focused on how Enterprise Risk Management (ERM) fared during the economic crisis and focused on ERM insight and strategies looking forward. Swiss Re CRO Raj Singh’s presentation can be summed up in the five rules of engagement for CROs:

. Know what’s beneath the deck: It is important for senior management to have a more holistic and detailed grip on operations
. An equal seat at the table: The CRO having a seat at a decision-making table is a challenge for several risk managers but also one that is acknowledged as an important step by several of the larger companies. Stefan Lippe, Swiss Re CEO, for example, stated that his ‘actions are not dominated by his opinions’ and that the input of his CRO is extremely valuable. The Swiss Re CRO is a member of Swiss Re’s Executive Committee
. Think the Unthinkable: A crisis is often the result of a risk that has not been thought
of or a risk that has been overlooked or under-estimated
. Be everywhere: The importance of a culture that every manager is a risk manager and that the relevant information permeates back to the risk function cannot be over-stated
. Speak out: Key officers were rapped by the judge (and even sentenced) for knowing what was going on and not speaking out in, for example, the Independent Insurance Company plc case in the UK

In the words of Axel Lehmann, group CRO for Zurich Financial Services, “ERM should be deeply engrained in strategy.”

The morning sessions were followed by presentations on Solvency II implementation progress and regulatory development in the US by the European Commission Head for Insurance and Pensions and the CEO of the National Association of (US) Insurance Commissioners respectively.

The second day morning sessions of the conference proceeded with an equally impressive line up of speakers including Stefan Lippe, CEO of Swiss Re, Rob Jones, Standard & Poor’s managing director, and Paul Sharma, director of prudential policy at the UK Financial Services Authority. To mention two themes from two of these speakers:

. “Let us not be affected by the winners’ curse.” (Paul Sharma, UK FSA). This is with reference to the risk of relative complacency arising from the fact the crisis has not resulted in systemic failure in the insurance sector. The fact that banks have been at the source of and mainly bore the brunt of the crisis does not make us immune to similar risks.

. “Crisis sharpens the sense of  urgency.” (Stefan Lippe, Swiss Re CEO). Lippe was talking about the urgent need to implement the regulatory reforms, particularly Solvency II regulations within the industry and to create common international solvency benchmarks or matrices with other jurisdictions internationally.

The breakout sessions on both days were equally engaging tackling issues of systemic risk, cyclicality of risks, climate change, systemic risk regulation in insurance, risk partnerships between private and public bodies and risk reporting.

The cherry on the cake was a delivery by a guest speaker to the conference, Gillian Tett, assistant editor at the Financial Times, journalist of the year at the British Press Awards 2009 and author of Fool’s Gold. I can only quote an independent newspaper book critic to condense her interpretation of the events leadingto the financial crisis: “Ever the anthropologist, Tett sketches a system in the grip of a great error, emanating outwards from a cadre of elite traders who were able to repel any attempt to monitor, question or restrain them. Greed is in there. Fear, too, …fraud, and wilful negligence … and poverty of imagination among regulators. Fool’s Gold resists simple answers to a complex disaster – and so should we.”

With this lesson, the framework for next year’s CRO Assembly (to be hosted by Munich Re) has already been etched. Drawing on the words of Albert Einstein,“The significant problems we face cannot be solved at the same level of thinking we were at when we created them,” the sixth CRO Assembly in Munich 2010 already aspires to deliver insight and engagement.