Raj Singh, Swiss Re's chief risk officer, commented: "The financial crisis has demonstrated the need for an integrated approach to risk management and one that encourages risk managers to think in terms of scenarios. The crisis also reinforced the case for Solvency II as a principle-based, economic, risk-sensitive and prudential approach."

According to the report, regulators and governments in many countries have launched initiatives to bolster financial stability and restore market confidence. While recognizing that they themselves had not adequately appreciated the risks building up in the financial system, most are reviewing their regulatory regimes to help identify and avert future crises.

The paper stressed that it is crucial for the insurance industry that regulators and governments succeed in their battle to restart the world's financial markets.

Success will require international cooperation and coordination, with group-level supervision and efficient capital management for global (re)insurance groups, according to the report.

Any new regulation, it said, will need to take into account the insurance industry's distinct business model, avoid creating market distortions, and offer clear incentives for sound risk and capital management.

The paper summarizes the CRO Forum's views on the key elements of effective risk management, the differences between insurance and bank approaches to risk management, and the importance of economic-based group supervision for cross-border (re)insurers.

It covers five major themes the CRO Forum considers to be adequate responses to the crisis. The themes, according to the paper, have proved to work effectively for (re)insurers that have followed these principles and they should form the basis for any conclusion to be drawn as lessons learned from the crisis.

They are:

o Integrated risk governance--(Re)insurers rely on sound and comprehensive internal risk governance to respond effectively to changing market conditions. The risk management function needs to be pre-emptive, independent and empowered.

o Risk models--While these are indispensable tools for developing business, designing and managing products, valuing portfolios, gauging capital adequacy, and for regulatory purposes, they can never be a substitute for common sense, as they do have significant inherent limitations.

o Liquidity risk management--The credit crisis is a sharp reminder of liquidity risk as distinct from risk to capital adequacy. Liquidity risk management has to prepare for the unexpected and thus relies on scenario testing to anticipate the effects of extreme situations. However, it is important to note that liquidity risk of insurers is fundamentally different from that of banks.

o Valuation and risk disclosure--Renewed market confidence requires accurate valuation and the prompt disclosure of relevant risk information. Market-consistent valuation of both assets and liabilities should become the principle that underpins financial information and prudential oversight in insurance. Properly applied, these would not aggravate pro-cyclicality.

o Group supervision--The financial crisis emphasizes the need for international cooperation among regulators to develop group-level supervision, particularly through results-oriented supervisory colleges for large and global insurance groups.

The CRO Forum said it supports a principle- and economic risk-based approach for the supervision of groups, which assesses their consolidated risk exposure and capital position in line with economic reality. The efforts of the International Association of Insurance Supervisors (IAIS) should be strengthened by introducing binding standards that would accelerate regulatory convergence, CRO advised.