Exposure management: Forewarned is forearmed

Suki Basi argues that further market transparency is necessary in order to deliver improved exposure management.

While gaining increasing importance in the current and future regulatory regime, exposure management can be stripped of a lot of its complexity whatever the specialist lines of business underwritten. In its simplest form, exposure management is an understanding of the relationship between market losses and portfolio losses prior to any event occurring.

It might look simple on paper but, without accurate and effective exposure management, a reinsurer cannot effectively price the risks it is underwriting, evaluate any outwards reinsurance requirements nor understand the level of capital required to support the business. Given the drive towards great understanding of the requirements demanded by the Solvency II regime, good exposure management will be at the heart of the successful underwriting organisation of the future.

Integration
The future ideal of The Russell Group is one in which all parties work together as a community, giving practitioners as-close-to perfect information as is possible at the point of decision making. This then allows them to focus on creating value for their companies by understanding and managing the risk better rather than wasting time just trying to establish what the risk is. We foresee a new age of exposure management in which knowledge or information is no longer enough, a future in which sophisticated use and interpretation of knowledge is key.

How to deliver such a future is the question that continues to fuel debate across the industry.

For a reinsurance company, good exposure management has a number of basic requirements: data and a framework within which to model possible market losses; a transparent relationship with its clients; and robust software to process the analysis. To a certain extent, all of these requirements are influenced by factors outside the reinsurer's control.

Most companies do not produce proprietary data and, to achieve any valid level of transparency, a degree of market collaboration is necessary. The future aim has to be to enable complete exposure management by addressing all these issues and providing an integrated approach to insurance and reinsurance companies operating in the specialty lines segment.

To allow for increased market transparency, Russell believes the market needs to embrace currently available technologies that enable peer-to-peer communication, as well as forums to shape the future market. Currently, most catastrophe modelling software companies base their business around protected formats and information that can be utilised with only their software. We believe the answer can be found only by working with the entire market to develop standards and best practice, with the results being used by client and non-client alike.

Assumption error
It might sound simplistic but reinsurers should no longer accept a treaty for which they have no mechanism to quantify the extent to which the assumed exposures accumulate within their existing portfolios. Reinsurers would not accept this in property catastrophe lines and, with risk management at the heart of the new regulatory regime, they should not and will not continue to do so in specialty lines. Furthermore, it is unlikely that regulators will accept "it's always been done that way" or "the client or broker doesn't want to provide us with the information" as excuses for absent risk management control.

Suki Basi is a director at Russell Group

Read more:http://www.postonline.co.uk/reinsurance/analysis/1800422/exposure-management-forewarned-forearmed