Risk management will need fresh ideas and new processes, says Jess Brown, Senior Risk Manager, New Re, who explains that insurers working on their models to better understand the cyclical changes could be key to future stability.
“We had these crashes in March 2020, but we didn’t know what
would happen in the second or third waves [of Covid-19 infections].”
In Clear Path Analysis’s Insurance Asset Management - Europe 2022 report, several market experts from insurance groups including Aviva, Legal & General Insurance, LV+, ReAssure, explore how to navigate the post-pandemic financial markets and what investors need to know in the recovery phase, including risk management for unexpected events.
“We had these crashes in March 2020, but we didn’t know what would happen in the second or third waves [of Covid-19 infections],” says Brown. “We didn’t know whether it was going to happen again, so there was a lot of uncertainty about the market.”
She says many of the lessons they learned were around scenario and sensitivity analysis. “When you are in these stressed environments, you need to run these processes again to see what your new sensitivity is because it could have massively changed,” she said. “For us, the interest rate up or downwards scenario flipped during this time. This was something entirely new that had to be explained to our board, so they could understand that it was in the other direction from what we had been telling them for the last few years,” she says. “Of course, once it recovers, it may then flip back.”
Brown says it’s about being aware and knowing the actuarial control cycle or the feedback loop that everything you have experienced then gets fed back into the company’s models and that the leaders understand what has happened and why.
This also means that as investment risk managers, it is important to consider other sorts of risks and to think beyond mainstream risks such as credit risk, inflation risk, and property risk.
"Was this just a temporary fix and when the government extracts
itself, are we going to see a massive influx of defaults?”
“Credit risk is one that I am keeping my eye on now,” she says. “There is a nice example of this in our update to our credit rating transitions. When we added the year [covered by the pandemic], it became less likely that corporate bonds would default, so in our transitions the probability increased,” she said.
This, Brown added, was very strange to see in what should have been an extremely volatile year that had defaults. “But it didn’t have defaults because of the government intervention and the aid. Was this just a temporary fix and when the government extracts itself, are we going to see a massive influx of defaults?” she said. “Alternatively, is it all OK, they have weathered the storm and it should be fine. This is one area where I am quite interested to see what happens.”
