One of the most frightening aspects of the financial services meltdown is that it may well happen again. Indeed, a new paper from
While using the subprime mortgage crisis as a lens on the financial services meltdown, the paper, "The Financial Crisis and Lessons for Insurers," focuses on risk management in the insurance industry.
"The burst of the housing bubble and subsequent global financial crisis exposed many structural issues in the broader financial system and weakness in firms' risk management approaches; they must be addressed to avoid another major crisis" says
The paper also contemplates the factors, such as aggressive investing, that caused to insurers to take a hit during the crisis. The paper counsels insurers to keep watch on high profit areas, as these are the areas where the greatest risks emanate. For a strong risk management culture take hold, it must start at the top, the paper argues.
This last bit of advice dovetails with analysis found in a new report from Boston-based
Ding suggests that risk tolerance must be made at the highest level.
“Risk appetite must be set by an explicit process, requiring input from business heads, risk, finance, and the board,” he says. “The risk appetite statement must specify on-strategy and off-strategy risks and give tolerance levels for all types of risk the institution faces, including capital, liquidity, earnings volatility, and reputation. Most importantly, it should be expressed in a way that can be understood and acted upon.”