One of the most keenly attended sessions at the Life Conference, which took place in Liverpool from 20-22 November, was John Roes The sting in the tail.
During the session, Mr Roe urged actuaries to rethink '1-in-200-year' tail risk definitions and outlined tail event drivers, hedging approaches and their application for insurers.
With macroeconomic uncertainty and market volatility consistent themes of the past three or four years, there is an increased focus on tail events across insurers. Existing UK regulations and Solvency II aim to allow for such outcomes.
However, Mr Roe questioned the approach, calibration and time horizon for capturing those extreme events, as well as the behavioural finance problems associated with labelling them 1-in-200-year risks.
The presentation also discussed why capitalising insurers to withstand much more severe stresses would be detrimental for the economy and, ultimately, the government's debt position over time. This in itself is a key concern for markets. With those theoretical aspects covered, the focus shifted to the current tail risks and how accommodative policy and shock-dampening since the mid-1980s had contributed to a misconception that the business cycle had been tamed, contributing, in turn, to the extent of the effects of the 2008 financial crisis.
The discussion concluded with an examination of alternative approaches for identification, analysis and hedging of tail risks. It proposed moving away from purely statistical market stresses to attacking the problem from multiple angles, including macro-economic scenario generation, historical stresses and reverse stress tests to encourage an active, ongoing tail hedge debate and to try to build a safety net to protect against the emergence of such events.