It’s common knowledge that risk managers live disciplined business lives. Applying scientific models and empirical data to every aspect of their organizations’ well-being, these managers are routinely challenged by current events and circumstances beyond their control as well as those in an unknown future.

Yet the role and expectation of the risk officer is changing, according to Swiss Re, which this week issued a report highlighting the growing role of the risk manager in creating a pre-emptive risk management practice that enables disciplined risk-taking.

The report, “Establishing a Pro-active Risk Management Culture,” explores the role of the risk officer in applying the Solvency II framework to enable responsible and accurate risk modeling, governance, disclosure and transparency techniques.

Raj Singh, Swiss Re’s chief risk officer, asserts that risk managers are an “independent line of defense” in maintaining proper risk assessment practices. “As the financial crisis has shown, events that are not reflected in risk models can present the greatest danger,” said Singh.

In addressing the evolving discipline of risk management, the report illustrates a number of ways in which officers can reconcile their risk management activities with regulatory reforms, such as managing a risk model in reality, maintaining liquidity issues in the face of irregular market conditions, and understanding and applying appropriate risk tolerance.

Singh believes Solvency II is the best answer to the crisis for the insurance and reinsurance industry because it is based on economic principles. Besides quantitative elements such as capital requirements, Solvency II provides guidance on qualitative aspects such as risk governance and transparency.

And while the recent debate about Solvency II has focused mainly on concerns that supervisors would overreact to the financial crisis by introducing excessively conservative capital requirements, any discussion about the framework’s qualitative dimension has been largely ignored.

However, a recent survey conducted by the Institute of Insurance Economics at the University of St. Gallen reveals that many insurance companies also consider the softer, behavioral issues around establishing a sound risk management culture to be just as challenging when it comes to implementing Solvency II.

“Risk Managers must try to talk about 'the elephant in the room', enabling an open dialogue about business risks,” said Singh. “As the financial crisis has shown, events that are not reflected in risk models can present the greatest danger. Models are powerful, yet simplified reflections of reality. By setting out possible future states of the world in a disciplined way, risk managers should use scenarios to 'think the unthinkable'. In fact, complementing the models with scenario thinking is the essence of sound risk management.”

Swiss Re sees insurance risk managers as an independent line of defense, ensuring that the risk-reward balance is fully evaluated, and that all risks are sufficiently understood by the business. The insurer points to its own risk management model in action, a “three-signature” approach that requires large transactions to be signed off by the underwriting, client management and risk management departments.

The insurer posits that the positioning of the chief risk officer at the top of the organization is essential to drive such a risk management culture because it ensures that risk management is fully aware of the company’s overall risk appetite, applies risk limits accordingly—and maintains independence of judgment.

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