Recent press coverage paints a picture of a second credit crunch resulting from excessive regulation. The storyline goes something like this – regulations, adopted too quickly, could constrain banks (and by extension insurers) from lending and introducing new investment products, leading to a stalled recovery. The CEA, the European insurance and reinsurance federation, warned last week that ‘... excessive capital requirements would have unnecessary and harmful consequences for the insurance industry, for the economy and for society’.
It’s not surprising that actors who face the greatest changes in their roles and responsibilities should object, but language appealing to fear of the unknown reveals more about the actors than they, themselves, may realise. Lessons learned from the global banking crisis are now centre-stage in a fundamental re-thinking of risk management at all levels within financial institutions and regulatory authorities.
Key weaknesses leading to excessive risk-taking included:
Solvency II, Europe’s comprehensive risk-based reform of insurance regulation, and Basel III, which heralds further regulations for banks on capital adequacy, leverage ratios and liquidity standards, will fundamentally shift the focus of the industry for many years to come. The winners will embrace the substantial changes in governance and in infrastructure required over the next five years as a downpayment on improved ability to make pricing and product decisions, reduced operational risk, and increased shareholder return with less volatility. The losers, not seeing past minimal spending on compliance, will be left with less competitive products, declining market share, and may be forced to merge or exit their businesses.
- Excessive appetite for yield
- Failure to properly understand risk
- Over-reliance on models and assumptions leading to a false sense of security
- Imbalances between risk and rewards, especially in remuneration
- Failure of boards of directors to establish and demand leading roles in setting risk tolerance and managing through the crisis
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