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Risk Modeling Potential Source of Systemic Risk, Says Amlin and Industry Group

-- (Re)insurance Decision-Makers Are Over-reliant, on “Autopilot,” Overly Trusting of Models --

-- New White Paper Provides Best Practices Guidelines and Scorecard Quantifying Systemic Risk --

LONDON, Nov. 04, 2015 (GLOBE NEWSWIRE) -- Amlin plc (LSE:AML), a London-headquartered, global specialty insurer and reinsurer with more than 100 years of underwriting experience, today announced the release of an industry working group white paper, “Systemic Risk of Modelling in Insurance: Did your model tell you all models are wrong?” In contributing to improvements in risk management, Amlin has collaborated with the Oxford Martin School and leading (re)insurance organizations to form an Industry Working Party to develop this report. The aim has been to understand how different factors build up systemic risk when risk models are used, and approach a way of detecting the risk.

The purpose of the white paper is to advance the understanding of systemic risk associated with modelling practices within the insurance industry. The paper is focused specifically on the practical understanding of Systemic Risk of Modelling and development of practical solutions for managing those risks within the insurance industry. Examples of systemic risk are as variable and diverse as financial asset price bubbles, to the collapse of the Atlantic northwest cod fishery. Most discussion of systemic risk in the financial sector tends to focus on how institutions become connected through economic ties and how this can cause contagion. The insurance industry is intrinsically more risk-averse than most financial industries because of its nature. However, there is one area that is often overlooked as a source of systemic risk: risk modelling itself.

The Working Paper posits that (re)insurance decision-makers have become over-reliant on automation, thereby overly trusting models despite common sense and failing to cross-check. The selection of model sources may be influenced by priorities other than quality. In addition, the oligopolistic nature of markets with large economies of scale allows the few global risk modeling players to be more authoritative as central sources of knowledge, rather than justified by the quality of their models alone, which further corroborates the risk of “group think” or “putting all of ones eggs in one basket,” when it comes to mitigating wide-spread risks.

Simon Beale, Chief Underwriting Officer, Amlin plc, said, “As a result of this concerted research we are better positioned to design a Systemic Risk of Modeling scorecard that firms and regulators can use to monitor and manage systemic sources and measures of systemic risk. In addition, practical solutions towards measuring whether risk management decisions and modelling practices are aligned with reducing or heightening systemic risk were developed and are incorporated in this paper.” He added, “The Systemic Risk of Modeling scorecard is another significant step in managing the systemic risks we face, and ensuring that our reliance on the increasing amalgamation of models in the insurance industry is managed more effectively.”

Frank Nutter, President of the Reinsurance Association of America (RAA), stated, “Amlin is to be commended for its thought leadership on systemic risk and modeling. Global insurers value new approaches to assessing capital needs. Amlin’s intellectual contribution is both pragmatic and creative.”

“As we move into the 21st century the world is becoming more connected, more complex and more uncertain. The latest wave of globalization has integrated markets and finance while the information revolution has compressed time and space. In order to reduce systemic risk, risk governance needs to be strengthened,” remarked Professor Ian Goldin, Director of the Oxford Martin School at the University of Oxford. “There is a need for new models that take account of the integration and complexity of network structures, as well as for transparent communications about choices, risks, and uncertainty of policy alternatives, improved risk measurement, and promotion of resiliency and sustainability.”

This White Paper provides a framework for practitioners in the insurance industry – whether underwriters, brokers, modelers or executives, as well as regulators and people in other organizations that use risk models, to understand the Systemic Risk of Modelling and build a Risk Management process for it. The design of a ‘Risk Scorecard for the Systemic Risk of Modelling’ is a practical way to measure and raise awareness about Systemic Risk of Modelling within organizations.

Amlin and the Oxford Martin School have worked collaboratively with this group of experts and market practitioners with representation from life and general insurers, reinsurers, catastrophe model vendors, brokers, regulators and consultants. In addition to Amlin and the Oxford Martin School, the Working Party members include Standard & Poor’s, the Bank of England, Tiger Risk Partners, Willis, PwC, ACE, Hiscox, Travelers, Prudential, XL Catlin, Arch, Risk Management Solutions, AIR Worldwide and others. By bringing together the ‘best minds’ in the business with the ‘best minds’ in academia, an effective and meaningful The Systemic Risk of Modeling scorecard has been developed which can be used by firms and regulators as part of their toolkit to better monitor and manage risk.

About Amlin

Amlin (LSE:AML) is a global specialty insurer and reinsurer with more than 100 years of experience in the insurance markets. The company’s strong foundation and superior financial strength demonstrate that it’s here for the long-term. Amlin’s track record is built on a proven strategy; encouraging its teams to apply the firm’s successful underwriting formula, incorporating a dynamic approach to risk, while developing a geographically diverse global portfolio. Amlin underwrites more than 30 classes of business through three underwriting platforms: Syndicate 2001 at Lloyd’s, Amlin AG in Switzerland and Amlin Europe in the Netherlands. Amlin plc and its underwriting subsidiaries are highly rated for their financial strength.


Media Contact: Marisha Chinsky Makovsky mchinsky@makovsky.com +1 212 508-9654

Source:Amlin plc