Managing Risks in an Uncertain World

No. 15 , February 2015 Managing Risks in an Uncertain World By Pierre-Olivier Bou?e+ Interesting times It is an interesting time for the global economy. The market volatility that characterised last year looks set to continue, exacerbated by falling oil prices and, with the Eurozone slumping into deflation, the European Central Bank (ECB) is expected to start a programme of quantitative easing soon. Unsurprisingly, low growth and hi gh unemployment in many countries are fuelling political uncertainty, including general elections in Greece and the UK that may threaten the integrity of the European Union (EU). Low long -term interest rates in developed economies still pose a major challe nge for life insurers. The long-term nature of our liabilities means that we naturally prefer an upward -sloping yield curve. At the moment, we are faced with a yield curve that is both at historically low levels and flat. This makes it difficult to find sufficient returns to meet our long -term commitments to customers ? a difficulty that will only be compounded as the need for strong returns on savings grows with aging populations. At the same time, our industry is dealing with the implications of a wave of new regulation, from Solvency II in Europe to ComFrame and the development of new capital standards for global systemically important insurers (G - SIIs). Regulators? focus on limiting risk is understandable, given the impact of the financial crisis. We must remember though, that good risk management is not just about preventing risk taking, it?s about allowing a company to take informed, controlled and proportionate risks that are necessary to create value for customers, shareholders and the wider economy. Insurers are expert risk managers Volatility is nothing new. My own company, Prudential, was founded in 1848, a year of revolutions across Europe. We have served our customers through two world wars, the sinking of the Titanic and numerous global economic upheavals over the past 166 years. Today, we have around 25 million insurance customers in the U.K., U.S., Asia and Africa and $730bn of assets under management. Indeed, our industry exists to help customers deal with uncertainty. We enable people to go ab out their lives with confidence, and we help the economy function, by offering long -term protection, savings and investment to individuals, to families and to businesses. In short, we take the worry out of risk. The question is, what is the best way of man aging risk in the current context? As Prudential?s Chief Risk Officer, I am naturally sensitive to the negative effects of risk. But I believe it is just as important to enable Prudential to take full advantage of potential upsides. It is easy to forget that risks, when well -managed, can bring rewards. This is in line with the fundamental meaning of risk? If one refers to the origin of the word risk, one finds ?risicare?, an Italian word that means ?to dare?? Too often, risk is seen as only negative; this i s a mistake that one should avoid. + Group C hief Risk Offficer, Prudential plc.