Page 22 - Insurance Times December 2015 SAMPLE
P. 22
Cover Story
Broadening risk
management
domain to
understand tail
risks better
T his article discusses the current practices the tail of the distribution whose probability is very small
adopted in risk management by analyzing micro but impact is very high. Such events are often difficult to
risks but ignoring macro risk analysis. The article predict and sources of insolvencies.
identify few key global risks and recommend
that such macro level risk assessment should be made part To assess these tail risks better, modern day risk manage-
of risk management process by regulators to reduce the ment techniques are using stress test to know the level of
chances of future global level crisis. loss that can occur if tail event crystallizes. The key in the
success of stress test is identification of likely tail scenarios
Current focus on risk management that may happen so that such stresses can be formulated.
However, different countries and different regulatory re-
The current focus of risk management process is managing gimes are using different stresses and there is a no com-
around micro risks such as market risk, insurance risk, op- mon methodology in framing such scenarios at present.
erational risk etc. to help optimize risk based capital. One
of the key measures used in computing the risk based capi- In the current process of risk identification and risk assess-
tal is Value at Risk methodology which is a maximum loss ment, macro risk analysis is finding very little space. It has
that can occur to the business within a defined time frame been seen in the past that many of the micro risks starts
and defined probability confidence level. However, the risks developing from macro environment but its signals are of-
than can devastate a financial institution are risks sitting in ten ignored. Many financial disasters in the past happened
due to crystallization of micro risk but key trigger points
Sonjai Kumar were macro events.
Vice President (Business Risk) Though Baring Bank failed due to Nick Leeson's position into
Aviva India the derivative market, however, it was 1995 earthquake in
Japan that led to fall in Nikkei index and index in other Asian
18 The Insurance Times, December 2015
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