The Deficiency List: Rethinking the Risk Agenda for Insurers

October 21, 2008

Abstract

There is little doubt that the financial crisis will spill over into the economy. This will have a profound effect on both sides of the balance sheet of insurers; with potential continued weakness in the credit and equity markets and unexpected changes in the behavior of the existing policyholders as well as the volume and product mix of new business.

The liquidity and credit events of the last few months are unprecedented. We have witnessed the failures of leading investment and commercial banks across North America and Europe. Insurers continue to be under significant pressure as evidenced by widening spreads on credit default swaps and falling equity valuations.

While observing spectacular failures of major banks, many insurers are continuing to take comfort in "false positives" with regard to their own risk management practices. The Deficiency List: Rethinking the risk agenda for Insurers, identifies four deficiencies with respect to the current risk management practices at many insurers:

1) Lack of an effective risk governance structure
2) "The Income Myth" of insurance land
3) Breakdown between risk appetite and management decision-making
4) Lack of robust early warning indicators and poor risk information

While insurers and banks are subject to different risk exposures and liquidity needs, recent experiences have demonstrated that the financial services industry is highly interconnected, often through complex and opaque channels. It may be too early to predict how the regulatory landscape will evolve in the coming years. However, one thing is certain: the US will see a major overhaul of the regulatory framework, and a more approach to regulation will emerge.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

2. "The Income Myth" of insurance land 6
4. Lack of robust early warning indicators and poor risk information 10

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