Page 24 - Insurance Times December 2015 SAMPLE

stressed condition increases which should be kept in mind
while aggregating economic capital.
Spotting of unusual activities in global landscape is another
way to have better risk identification process. Some of the
activities could be political unrest or increased parleys be-
tween few countries, high market returns in the stock mar-
ket without reason, extreme weather condition prevailing
for a long period of time, boom in one sector in the economy
without enough rationale, unusual high profit shown by
some companies while other competitors are struggling etc
. creasing inflation immediately affecting increase in interest
The 2008 global economic crisis had shown that boom in the
housing market followed by new financial products was an
unusual activity, if analyzed and assessed for its impact, the
risk might have been reduced.
Enhancement in risk analysis
Understanding of the tail risk through expanding the risk
identification horizon to global macro risk factors, spotting
the unusual trends in the global activity, better understand-
ing of correlation between different risks under the stressed
condition would help identifying tail risks better. Such assess- In such situation, even the national governments may not
ment would also reduce capital, through release of capital
kept aside for catastrophe risk and through better location
of risks.
The regulatory bodies round the world should start includ-
ing the macro risk analysis as a part of risk management
process along with current practice of micro risk analysis as
shown in the picture. By doing this, it will help regulators in
spotting early trends as many of the micro level risks ger-
minates in the macro garden and follow a cascading effect.
This will give more confidence and increase credibility to the
20 The Insurance Times, December 2015
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risk management process in fighting against the collapse of
another financial disaster that may happen in future. As
identified by World Economic Forum, geopolitical and envi-
ronmental risks are more important risks for the future of
this world compared to economic risk as thought today.
The initials signs of these risks are spottable even today
through an erratic pattern in the environment worldwide is
.One may not be surprised if the world witness the impact
of extreme weather impacting the ability to grow food (just
an example) for the world; this may lead to food crisis in-
rate; this would further lead to fall in the stock market, re-
ducing asset value and creating mismatch between assets
and liability.
Similarly, geopolitical risk is raising its head slowly in the
current unipolar world. It may happen that, the impact of
interstate conflicts, failure of national government and slow
economic growth may give rise to long lasting impact on
the global economy and it may take years to recover. If this
happen financial system round the world will crumble to-
gether taking away the confidence of the customers.
be able to bail out financial institutions due to sheer size of
losses. The focus here is to widening the scope of risk man-
agement from current narrow focus.
The macro risk analysis process could be made as a combi-
nation of regular monitoring of macro risks as a part of risk
management or extended to quantification of such risks
using multifactor models or extreme value theory feeding
into micro risk analysis which flows into the capital calcula-
tion. This flow of risk analysis would help in identifying the
tail risk better which may not remain a tail risk anymore
reducing the uncertainty.
Currently, regulators have prescribed stress test to get the
flavour of tail risk, however, such stress testing is not regu-
larly performed, no standardized approach is available and
different regulators are doing different tests where the
world is facing common risks.
There is a need for all the regulatory bodies to come to-
gether and take up the exercise of assessing the key global
risk and incorporate into the risk management framework.
This will reduce the chances of world facing another crisis,
though it is impossible to remove such happening with full
certainty, but can reachable.