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  Issue 29 | Archive November 2016

Prof. Dr. Paul Embrechts Conducts a Public Lecture on Risk Management in Banking and Insurance

On 7 November 2016, Prof. Dr. Paul Embrechts, Professor of Mathematics at ETH Zurich, held a public lecture for an audience of nearly 70 participants, consisting of financial professionals, regulators, academics, as well as students. The lecture was titled ¡°Risk Management for Banking and Insurance: Then, Now, and Tomorrow.¡± Prof. Embrechts launched into his talk by stating that financial institutions in insurance and banking find themselves in constant search for a balance with their various stakeholders, specifically between the companies and their regulators. The talk focused on the regulatory regimes in banking and insurance, Basel III and Solvency II respectively, and their critical appraisal.

First Prof. Embrechts gave the audience an overview on the history of various ideas in the fields of finance and insurance that have helped shape modern financial and insurance markets. Discussing the basics of Basel II-III and Solvency II, he commented that the use of internal models was granted with the aim of achieving greater risk sensitivity and that the calculation of risk weighted assets through these models became widely accepted. This gave rise to what he termed as ¡°model-Darwinism¡±, that is, survival of the fittest model.

Describing the recent consequences of the shift from Basel II to III Prof. Embrechts stated that quantitative and qualitative modeling considerations are both important. He highlighted the shift from ¡®if-thinking¡¯ models such as value-at-risk (VaR) model to ¡®what-if¡¯ models like, expected shortfall (ES) model. Speaking about solvency capital, risk weighted assets (RWA), and leverage, he said that under Basel II-III, regulatory capital is calculated as a percentage of RWA. (Mis)use is prevalent in such cases via creative accounting, tax constructions, and financial engineering. He also touched upon Solvency II and principle based versus rule based regulation, before moving on to a discussion of current regulations in place, where he criticized some of their shortcomings.

Referring to the growing use of operational risk models Prof. Embrechts opined that, ¡°I do agree with the overall assessment by the Basel Committee on the [advanced measurement approach] AMA for operational risk, and indeed in the past have voiced my concerns about the (im)possibility of the AMA/LDA on the basis of availability and quality of statistical OpRisk data, I still strongly feel that, at least for bank-internal purposes, more detailed statistical modeling is useful. This is very much akin to total quality control in the industry.¡± Prof. Embrechts¡¯ final comments concentrated on his personal view on the risk management challenges facing the world of insurance and banking going forward, specifically the following two: (i) low (even negative) interest rates over a period of time and (ii) blockchain technology.

Prof. Embrechts is Professor of Mathematics at the ETH Zurich specializing in Actuarial Mathematics and Quantitative Risk Management. He has co-authored influential books like Modelling of Extremal Events for Insurance and Finance, Springer, 1997, and Quantitative Risk Management: Concepts, Techniques and Tools, Princeton University Press, 2005 and 2015. He also consults on issues in quantitative risk management for financial institutions, insurance companies and international regulatory authorities.

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Published quarterly by Risk Management Institute, NUS
Editor: Shivani Nakhare (rminsr@nus.edu.sg)