In 2008, Dave Ingram wrote down 47 lessons that could be learned from the financial crisis. 10 years later, they still ring true
InsuranceERM opened up shop 10 years ago, just a few months after the peak of the financial crisis. Perhaps that was a lucky time to start a new risk-focused activity; I started my current position at Willis Re just a few months earlier.
Since then, I have focused mostly on what I now call the human side of ERM and, over the past 10 years, there have been plenty of very human actions related to risk and loss and risk management to observe.
Quite a bit has changed in the ERM landscape since then. Solvency II, which seemed to be two years in the future for almost a decade, finally happened. And so far, there is no evidence that any of my worst fears about Solvency II will occur anytime soon. Every EU insurer has not decided to run to the same side of the ship at the same time.
Coming off the financial crisis, there are a number of things that we might have learned. That fall (2008), I wrote down 47 such lessons that came to my attention. Looking back 10 years later, they all still look true to me. My favourites from that list include:
It must be okay if everyone is doing it – Everyone was making money off of the US housing market. But that did not make it a good idea to join the parade.
Everyone cannot be marginal – One analyst said everyone was using the same model to assess transactions that assumed the user was a marginal player in the market.
Growth and risk – Growth does not always mean excessive risk, but almost every risk related blow-up was preceded by high growth.
Diversification vs. correlation – These are not flipsides. Correlation is just a mathematical calculation that may be driven by nothing more than coincidence.
"This is the end of the cycle" – Or, "This time is different". When you hear this, RUN for your life.
Valuation models are generally pro-cyclical – Downturns are magnified by losses and reactions to associated worsening of valuations.
Too much "new" – Everyone took on too much exposure to totally new instruments. Perhaps there is a need for a "new" appetite and tolerance.
Excessive complexity – One chief investment officer for a major insurer told me he stayed away from the mortgage-related securities because he did not understand how the complex structures could make 1+1 = 3 or sometimes 4. He seemed unsophisticated before the crisis. Brilliant after.
Risk management as compliance – When an outsider calls the shots for risk management, the way for a front line manager to win is to find the crack in their programme.
Adversarial risk management – Not as common within insurers; banks created a battle between profit makers and risk limiters. Very hard to make this work for the good of the financial institution.
Dave Ingram is executive vice president at Willis Re