Risk management issues in insurance Editors: Martin Bird and Tim Gordon
Publisher: Bloomsbury Information Ltd
"The book's main substance relates to the management of longevity risk. Several chapters explain how risk can be transferred into capital markets"
Martin Bird and Tim Gordon have pulled together a collection of brief essays on several aspects of insurance risk, with a particular focus on the risk of pensioners living longer than expected.
Recent years have seen an avalanche of technical risk management texts, often stimulated by new rules such as Solvency II, Basel III or International Financial Reporting Standards. This collection is not like these. Largely free of formulas, and without prescribing particular methodology, the book instead raises issues that the thinking risk manager should consider.
Several chapters are of general interest. An essay on emerging risks analyses three failures in some detail: Long Term Capital Management, AIG and the Bhopal disaster. Another chapter on firms' own risk and solvency assessment describes the use of cognitive mapping techniques to harness expert input, alongside the application of complex systems theory to identify the underlying causes of loss events. These chapters are well written - but also strangely familiar. A quick search revealed that one chapter has previously appeared as a 2010 GIRO paper, while substantial parts from another appeared previously in The Actuary. This is not plagiarism, as the authors are recycling their own work, but it is disappointing to see whole paragraphs lifted verbatim from other sources.
The book's main substance relates to the management of longevity risk. Several chapters explain how risk can be transferred into capital markets, via longevity swaps or insurance linked securities. One chapter suggests that governments should step in to issue bonds as an insurer of last resort. The book contains perceptive analysis of historic trades as well as estimates of total potential market size. There is scant coverage, however, of other aspects of longevity risk, especially the rise of price segmentation by occupation or postcode, the risk of adverse selection or even the more mundane question, with an internationally mobile pensioner population, of ensuring those in receipt of a pension are still living.
A chapter on managing market risks summarises familiar themes of risk identification, modelling, monitoring and management, but the proposed solutions of using futures and options are hardly revolutionary. Given the subtitle "trends in best practice", I expected more on current topical derivative issues, including: the price impact of collateral support, proposals for centralised clearing of over-the-counter derivatives, impact of financial repression or the manipulation of market indices such as Libor.
The book does not claim to be comprehensive, and many risks relevant to insurers are not considered at all. There is little mention of profit-sharing business, or savings business with other forms of embedded guarantees that give rise to special risk management issues. There is no consideration of term assurance or unit linked savings, while discussion of general insurance is limited to a chapter on catastrophe bonds. More surprisingly, there is no discussion of credit risk, despite the increasing focus of insurers and regulators in the wake of the recent financial crisis.
This book is likely to be of interest to those working in insurance companies, although it is not a manual of current practice. It is most useful to actuaries advising pension schemes or insurance funds who wish to reduce their exposure to longevity improvements. The book's structure as 15 short essays means that no subject is covered in great depth, and it is hard to pick out any unifying theme. On the other hand, little prior knowledge is assumed and each chapter is self-contained. Actuaries may enjoy dipping in and out of this book, picking up some new and interesting perspectives, especially in relation to longevity risk.
Andrew Smith is a partner at Deloitte