From risk measurement to management

Firms have been working with ICAS for long enough now for the regulator to expect more from the industry’s risk management procedures. In this extract from a market speech Sarah Wilson, insurance sector leader at the FSA, explains how the regulator/industry relationship is mutually dependent and beneficial.

Whilst Katrina and its aftermath has driven changes in traditional market participants, it has also had the effect of making the market, notably for catastrophe risks, significantly more attractive to the capital markets. This is understandable - investors see insurance risk as a new means of diversifying portfolios as they believe it to be largely uncorrelated with the other risks they run, and the rates of return potentially available during the hard part of the cycle are very attractive. For the traditional insurer on the other hand, capital market devices – be they cat bonds, side cars or something else -offer new routes to risk transfer that might otherwise be unavailable at an economic price. Properly managed, such transfers increase capacity and/or reduce prices in the insurance market – to the ultimate benefit of the consumers that we are here to protect. As ever the key for us is ‘proper management’ and I will come back to that later in my remarks.