Year 2008 - Insurance Industry after current finanical tsunami

23 2008 YEARBOOK 二 〇 〇 八 年 年 刊 instruments all led to the indirect effect of draining liquidity from the system to facilitate trade and commerce. Key players in the insurance industries such as AIG, Swiss Re and others were affected by CDSs and investment losses from their portfolio of mortgage related securities and CDOs. Insurance companies which are not involved with CDSs, suffered decline in investment assets and related income on the other classes of investments. Lessons applicable to the Insurance Industry With the best risk management intentions and processes in the world, existing financial models engaged by insurance companies are inadequate in portraying ultimate systemic risks caused by the elimination of portfolio risks spreading effect and destructions caused by counter-party failures which create a “domino” effect. Insurance companies which strayed from their core business and underwrote innovative structured financial products suffered the most extensive losses and erosion of statutory capital The effect of sophisticated financial or insurance instruments which allow financial institutions to significantly multiply their leveraging capability were inadequately monitored. A strong and extended economic cycle have led to complacency and assumptions that asset values would continue to appreciate indefinitely. For insurance companies, many of whom will undoubtedly survive this financial crisis, the following actions should be considered: They must have sound underwriting discipline and maintain combined ratios well below 100% since investment returns will be less predictable and become a less reliable source of income. Insurance companies must embrace enterprise risk management and develop contingency plans including access to contingent capital to manage major catastrophes and systemic risks. Regardless of how attractive a particular risk might appear and how high the return, there must be protocols to strictly safeguard against an undesirable level of accumulation of similar risks. The insurance industry should refrain from structured arrangements whereby insurance capital are being used to assist companies to cover up balance sheet exposures by transferring these liabilities to a special purpose vehicle or financial insurance contracts. These financial arrangements have the unintended consequence of allowing companies to leverage their capital to undesirable levels without being detected. While there is a clear trend where insurance products and other financial derivatives are “converging”, insurance companies must specialize and develop unique expertise in managing specific risks as opposed to being all things to all companies. Prudent insurance companies who exercise care in preserving their capital and liquidity will be able to take advantage of the increased demands for risk transfer products as the cycle turns positive and can serve as the provider of risk capital which will facilitate recovery in trade and commerce. Mr. Bernard Fung , GBS, JP. Chairman and CEO Aon Asia Pacific Mr. Fung was appointed to this current role in 1997. He is a member of Aon Corporation’s Executive Committee and is responsible for Aon’s Asia Pacific operations headquartered in Hong Kong. Aon is the world’s largest insurance broker and has operations in 125 countries. It is a Fortune 500 company and listed on the New York and London Stock Exchange.