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A More Balanced Approach

May 1, 2009

Analysis of:Street-Smart Risk Management | www.rmmagazine.com

Sufficient internal controls were lacking and financial statements were misstated. Risk taking authority had been disproportional to accountability. Risks of the cycle can be better managed with the optimal blend of practical risk assessment and incentive alignment. Service fee business income can help relive the overall capital burden.

Probability Through Rose-Colored Glasses

November 10, 2008

Analysis of:Why Risk Models Failed to Spot the Credit Crisis by Adam Davidson | www.npr.org

This article should bring to light a common misconception in attempting to evaluate risk of financial loss which is that probability estimation techniques are often falsely relied upon as precise measures. One must remind oneself that in most cases probability of future financial loss cannot be precisely estimated. Such estimates are imprecise largely due to difficulties in accurately assessing dispersion around expected losses based on historical averages for an individual risk or aggregation of risks. The possibility of sustaining a financial loss under most circumstances generally ranges from remote (e.g., earthquake insurance) to likely (e.g., life insurance). While risk models are helpful decision-making tools, they should be relied upon only to the extent the financial arrangement allows enough flexibility so that the counterparties can equitably share in the risk of mis-estimating the probability of loss.

The Challenging Pass-Fail Paradigm in Reinsurance Accounting

August 29, 2006

Analysis of:RenRe proposes SEC settlement over finite risk | fpn.advisen.com

* Hindsight recognition of insufficient risk transfer as respects certain reinsurance transactions indicates that clearer and more comprehensive standards for risk transfer testing are still needed.

* The current risk transfer pass-fail paradigm for reinsurance accounting poses unique challenges, particularly for transactions under which the amount of risk transfer is limited by certain contractual features.

* It is regrettable that investigations into alleged misuse of “finite risk” transactions have led to forced resignations of some innovative executive leaders in the insurance industry.

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