Zanders Risk Management Seminar 2011
Navigation between market and regulations
About 200 participants attended Zanders’ Risk Management Seminar for fi nancial institutions on 28 November. This annual event took place in the old neoclassical church ‘De Duif’ (The Dove) on the Prinsengracht canal in Amsterdam. “This was a suitable location, where risk managers could fi nd shelter and counsel each other during these turbulent times,” said guest speaker Maarten van Rossem. This year’s theme? ‘Better navigation between the market and regulations.’
The day’s chairman, Jaap Karelse of Zanders, clearly set out the theme for the day. “While successive reforms to regulations are being introduced at an ever increasing pace”, says Karelse, “the resulting, more severe capital requirements are putting the profit objectives of the regulated institutions under further pressure. It appears to be a difficult, almost conflicting task, to be able to meet all of these goals at the same time.”
Dilemma
The first speaker was Wietze Reehoorn, chief risk officer (CRO) and member of ABN AMRO’s executive board. Reehoorn developed the theme from a bank’s perspective. After first arguing that the banking sector literally and figuratively appears to have squandered its credit, he delved deeper into the dilemma now faced by banks. Innovation and new products are being constrained due to the introduction of many new rules, he claimed. This is happening at the same time that capital and liquidity requirements have become far more stringent.
Revolution
Jeroen Potjes, CRO of ING Insurance EurAsia, expounded on the theme from the viewpoint of a large (life) insurance company. Potjes contended that the risks, in line with Solvency II guidelines, must be managed on an economic basis. For example, the options and guarantees in insurance liabilities are primarily hedged with fi nancial instruments that are recorded at market value.
“Solvency II is causing a revolution within the insurance world”
In actual practice, however, there are a number of difficulties inherent in this, including complex challenges that cannot easily be solved. An example that comes to mind is the option of selecting (risk-neutral) interest rates for calculating the net present value of liabilities and investments, and the way in which a premium can be incorporated into these rates in the event of market stress (a liquidity premium). Potjes also identified the issue of dealing with non-rational policyholder behavior in appropriate ways as a challenge.
According to Potjes, Solvency II will also cause the balance sheet of an insurance company to be managed ‘at-the-cycle’ instead of ‘through-the-cycle’. This enables insurance companies to respond more quickly to acute market conditions. All of this comes with consequences that are currently only partially understood. Potjes suggested that Solvency II is causing a revolution within the insurance world. In this respect he noted that a large amount of work still needs to be done over the coming years in order to give Solvency II its planned ‘soft landing’.
Foundation
Joanne Kellermann is responsible for supervising pension funds and insurance companies at the Dutch central bank. She made it clear to attendees that she believes the changes in regulations to be irreversible. In her presentation, Kellermann dealt with the quantification of risks and the function of governance as the foundation for good risk management. In the view of the Dutch central bank, Basel III and Solvency II will ultimately have to become an integral component of the risk management function of financial institutions. Only financial institutions with a strong risk management foundation will be able to withstand the turbulence on the financial markets.
Market fundamentalism
Finally, historian Maarten van Rossem, in characteristic fashion, presented his view of the current situation in the financial markets. According to him, the credit crisis originated in the 1970s. During that time, neo liberalism - described by Van Rossem as ‘the market fundamentalism of a group of fanatic believers’ - managed to get a foothold. This movement argued for the abolition of many laws and regulations due to their ‘market distorting’ effects. This policy continued to be pursued in subsequent years. According to Van Rossem, it is precisely the lack of adequate laws and regulations that led to the excesses that are at the basis of the credit crisis.
By contrast, in Van Rossem’s view, the euro crisis is ‘a problem of a political, a psychological and an institutional nature’. He added: “It would be much more logical if the crisis would be focused on America. Indeed, in the final analysis they are the cause of this immense traffic accident.”
According to Van Rossem, the solution is simple: “Allow inflation to rise by 3% per year for 10 years. This will eliminate half of the debt problem. If the United States organizes healthcare according to the European model and cuts the defense budget in half, you can perform miracles with the 10% of the GNP that is freed up this way.”
Van Rossem also had a challenge for the audience of risk managers: “The challenge for you is not to repeat the mistakes you made between 1996 and 2007… but can I believe that these errors will never happen again? No, absolutely not!”
