It is hard to take your eyes off the still-unfolding European financial crisis, but we need to keep looking for other sources of risk. Although again delayed in 2011 and perhaps still subject to further transition and political posturing, Solvency II is getting closer and closer. The aims of this regime and similar regulation are laudable: better, more transparent risk identification, risk management and risk mitigation. My worry remains the use and unintentional abuse of standard models, tools and methodologies.
European regulators will not approve specific catastrophe models, which is good as this would be an invitation to systemic risk if ever there were one. But in reality some models will emerge as de facto market standards and certain modeling approaches will come into fashion and become the expectation.
It is vital that firms, encouraged by regulators, consistently challenge the assumptions of their models and test the accepted status quo. For an individual firm, and an individual in that firm, it is hard to argue against being one of the pack—as they used to say, no one ever got fired for buying IBM. But collectively the risks to the market of such an unquestioning approach are huge.
Recognizing this, Willis has invested heavily over recent years in building relationships with the best of the world’s science base to test the implicit assumptions in natural catastrophe models. 2012 will see the launch of the Willis Research Network Economic Capital Forum. The forum will provide a focus for both best practice and assumption/modeling challenge for economic capital modeling. In this uncertain world, never has this been more important.
|This post was part of the special feature about What Risks Will Emerge in 2012? published January 24, 2012. The feature also covered emerging risks in these other fields:|
Power & Utilities
Supply Chain Interruption