Prudential Financial's ex-chief risk officer Nick Silitch reviews the key ERM developments of 2022, and explains how a changing rate environment will impact insurers
What was the most positive ERM development of the year?
We can break it down to two different sides. On the financial side is the fact that the NAIC, and Bermuda, are now aggressively pursuing the asset arbitrage issues, over issues like structured credit ratings. We've been chipping away in the background, but to have them actually do something is important.
On the non-financial risk side, I think one of the greatest pieces is the integrated data collection. Before, you had compliance folks, risk folks, and audit folks all doing independent risk assessments of the businesses.
Now there is one risk self-assessment where all of the data collection process can be done as one.
What was the biggest ERM disappointment this year?
It's not a disappointment, but [what] made the journey a little bit difficult, is that we came in and built the risk function from 2010. At that time, everybody was scared over what happened in 2008 and many people started baking in Fed puts into their stress testing. Therefore, there are an awful lot of people whose idea of an extreme stress test is one that looks like 2008. I think the good news is that has gone away. Because the Fed is very clearly not coming to the rescue this time around.
What emerging risks are you most concerned about?
I prefer to see it as evolving risks. I think the asset value piece is the one that's going to be the most problematic. In a world where interest rates, at the very least in the last 40 years, have only gone down, asset values have gone up. That is unlikely to be the scenario in the future. Rising discount rates, on the one hand, reduce the value of your liabilities, that's a good thing. But they also reduce the value of assets. At the very least we will lose that tailwind of lower falling interest rates. And when that happens, it's going to change the way we think about asset values and growth in asset values over time.
What is your favourite part of the Christmas holiday season?
Being with all of our friends and doing whatever the weather will bring us. If the snow is good, we cross country ski and downhill ski, and if the ice is good, we skate. If there is none of the above, we play paddle tennis and hike the mountain. It's lovely.
