Systematic risk in insurance

Lots on this topic to come over the next few months.

Insurers dealing with regulatory change

Insurers around the world are dealing with increased regulations and increasingly nervous regulators, just waiting for the next crisis to see how insurers will cope. In South Africa, SAM presents opportunities and challenges and the potential for a great deal of expense with limited direct business benefits.

Of course, the regulations in some form or other are coming and are likely to stay. The Actuary magazine has an article on some of the lessons for insurers and regulators about how to actually get some control and understanding of macro and systematic risks within the new regulatory models.

The cost of regulation

Basel II (and the collection of changes called “Basel II” by some), King III, Solvency II / SAM, IFRS changes, Treating Customers Fairly, FICA, Protection of Personal Information, RE exams and of course RICA all cost a small fortune.  Only the last doesn’t affect financial services companies.  No wonder the major industry concern is over-regulation.

New operational risk guidance from Solvency II

CEIOPS issued additional guidance around the standard formula for calculating capital requirements in respect of operational risk late last year.

Why was a new OpRisk formula needed?

The original formula for OpRisk proposed in QIS4 was widely condemned. Complaints included being too simplistic, being insensitive to risk (and basely primarily on business size) and the impossibility of calibrating to 99.5% in a meaningful way. CEIOPS accepts most of this criticism, but counters by reminding stakeholders that the aim of the standard formula is partly about being simple.

A more serious problem is that in comparison against companies’ own internal models, the standard formula produced results lower than companies’ own assessment. Median internal model requirements for OpRisk were 133% of the standard formula and 13 out of 16 countries reported higher requirements under their insurers’ internal models.

One of the aims of the standard formula is to be slightly conservative to provide an incentive for insurers to develop their internal models. Clearly this objective is not being achieved. Continue reading “New operational risk guidance from Solvency II”