Models need to be integrated with other types of risk analysis, said a consultant

Currently, one of the biggest risks to the insurance industry stems from a failure to recognise and understand the limitations of models, claims a new report.

Aside from the financial crisis overall, which is top business risk facing multinational insurers, the report stated the failure of insurers to recognize the shortcomings of models and adequately capture the nature of underlying risks has left some insurers unprepared for the current conditions.

‘The inherent complexity of financial markets and insurance products arguably makes it impossible to create a model that captures all the nuances and uncertainties in real processes that generate the insured loss exposure,’ said the study by consultants Ernst & Young (E&Y).

‘Even if it were possible to model the complexity of the risk, the random nature of events is such that some analysts expressed skepticism about what could be achieved with models and the need to integrate models with qualitative risk analysis,’ added E&Y.

Other risks facing the industry, according to the report, include:

Managing the underwriting cycle.

Geopolitical and macroeconomic shots stemming from international economic volatility.

Demographic shifts in core markets, including meeting the needs of aging baby boomers.

Taking the right approach to take advantage of emerging markets.

Managing and defining the appropriate distribution channels for a company's products.

Legal risks that will emerge in the wake of the economic downturn.

Climate change and catastrophic events.