Lack of empowerment and authority of risk management function contributed to financial turmoil, says ACE Insurance Mena

Notes and media contacts

The measures put forward in the report include:

• Risk management must start at the top

While risk management has absorbed a rising proportion of investment in recent years and occupied an increasingly senior position in the corporate hierarchy, it says that it has ultimately still lacked the authority to stand up against a potential opportunity for profit. As a 'support function,' the warnings of risk managers, were too easily sidelined by those running profit centres. Going forward, risk management must be an independent function with sufficient authority to challenge risk-takers effectively.

• Incentive systems must reward long-term stability

The mismatch between the short-term incentive structure and long-term risk exposure that caused the crisis has already been identified by many as a key area for reform. The bonus culture and remuneration models for senior banking executives must be overhauled to ensure that some rewards are withheld to match the maturity of the underlying business.

• Institutions must review senior level risk expertise

New financial instruments and trading strategies make the task of risk managers even more difficult. Institutions must ensure that they have sufficient risk expertise at a senior level and that risk staff offer experience in a diverse range of risks. There must be access to the appropriate tools, information and communication channels to enable the effective communication of concerns and issues. Risk managers must monitor developments in the 'real world' and update their risk management assumptions and systems on a continual basis.

• Human judgement should not be undervalued

The limitations and over-reliance on quantitative techniques and computer modelling must be recognised. These quantitative methods must be backed up with the inputs of human judgement and dialogue. In addition, regular stress testing should be integrated with the firm's overall risk management processes.

• Risk management must be consolidated across all operations

The financial crisis has demonstrated that there is difficulty in identifying and aggregating risks at a firm-wide level. The new culture must focus on risk as a concern for everyone in the business facilitated by clear and frequent communication across organisational and operational boundaries.

The report also recommends that, while a central risk function is essential to set a strategy and provide an oversight of the firm's risk position across its various business units and geographies, institutions must combined this with an approach which enables risk is embedded in the regional office or business unit so that each profit centre has ownership of its own risks.

• Risk management systems should be adaptive

The events of the past year have demonstrated the dangers of the failure to update or question assumptions about risk. Those developing systems need to continuously feedback real world observations into their design on a regular basis.

• Striking a balance between the centralisation and decentralisation of risk

Alongside a central risk function within a business to set risk appetite, implement and monitor controls and provide oversight of the company's overall risk position, risk management must be embedded in regional or individual profit centres.

• Avoid over reliance on data from external providers

Financial institutions must recognise the limitations of external ratings and risk information and supplement ratings with their own analysis, which should be continuously updated.

About the research:

The research for this report is based on a series of in-depth interviews with senior risk professionals and independent experts, combined with a process of desk research that comprised a review of current literature on risk management. Interviews and research were conducted by the Economist Intelligence Unit.

About ACE:

The ACE Group of Companies is a global leader in insurance and reinsurance serving a diverse group of clients. Headed by ACE Limited (NYSE:ACE), the ACE Group conducts its business on a worldwide basis with operating subsidiaries in more than 50 countries.

Media contact:

Katie Weeks
ACE
Tel: +44 (0)207 173 7585

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