Enhanced risk management required in times of financial crisis: Ernst & Young

The insurance industry and regulators should use the current global financial crisis to drive a constructive evolution of regulatory guidance, according to Ernst & Young’s Global Insurance Center.
Although the insurance industry faces fewer urgent liquidity challenges than banks do, their valuation of assets has been affected; many insurance companies have witnessed the depletion of their capital reserves, E&Y notes in a release.
The impact of the financial crisis highlights the need for enhanced risk management, Philipp Keller, leader of E&Y’s Solvency II Taskforce, notes in the release.
“It is our view that a principles-based, economic and risk-sensitive approach such as Solvency II, grounded in solid governance and supervisory principles, is the right response at this time,” Keller noted. “This will produce timely, consistent and transparent messages to the public.”
According to E&Y, a constructive evolution of the regulatory guidance should:
• complement the Solvency II regime with short-term liquidity testing and cashflow analysis, producing a more holistic approach in anticipating the impact of adverse events; and
• place more emphasis on the articulation and testing of company-specific threat scenarios, in addition to the standard quantitative requirements.
The Solvency II standards on risk management, and the market discipline they encourage, add a qualitative dimension to complement the quantitative capital requirements, according to E&Y.
This will help avoid over-reliance on models, which was a key feature of the crisis for the banking industry, the company notes.