For example, we see increased capacity in writing specialised risks like aviation, energy, marine and political risks. For the life insurance industry, we have also seen greater product innovation as well as increased interest from insurers offering more sophisticated products catering to the needs of the high net-worth and mass affluent segments. BIS Review 163/2010  1  Future challenges and opportunities 7. But greater challenges and opportunities lie ahead. Enhancing risk management capabilities 8. The recent global financial crisis has underscored the importance for financial institutions to have strong risk management capabilities. The use of risk management tools such as stress testing, for example, helps identify potential risks, and allows countermeasures to be instituted early. Insurers in Singapore would have to keep abreast of developments internationally, and should continually look for ways to deepen their risk management tools and capabilities. INCOME is no exception. But unlike some of the other insurers that are part of larger global financial institutions and can therefore leverage on their parents’ risk management expertise, INCOME does not have such an advantage. These global financial institutions have widely-tested risk management practices and more established risk management cultures, given their richer experience. INCOME would have to grow its risk management expertise internally, but it would do well to learn from these global players’ recent experiences. Strengthening governance 9. However, having risk management tools and capabilities alone will not be enough. The challenge is often in successfully integrating enterprise risk management into the insurer’s business, and this would require effective governance.

In this loop, we describe what has been termed a liquidity spiral, where an initially liquid bank’s concern about the solvency of its counterparty (or solvencies of its counterparty’s counterparties) or perhaps concern that itself may run into funding difficulty in the future, decided to forgo interbank interests and began to hoard liquidity. When enough institutions embarked on the  BIS Review 130/2009  3  same actions, a general freeze in liquidity ensued, leading to “unnecessary” defaults that further exacerbated doubts in the system. These examples of positive feedback loops were some of the interactions that took place in the amplification stage of the crisis, as market participants responded to specific problems and general distress. But while the feedbacks were important in themselves in setting off deleveraging and losses, it was also the interactions between these feedbacks that contributed hugely to intensifying the problem and multiplied the losses into a larger systemic problem. What we saw was the rapidly worsening crisis that spread beyond financial institutions into money and capital markets. On this aspect of loss intensification, a number of studies have pointed to joint exposures to common risk drivers and network linkages between financial institutions to be the two key propagation channels. Let me elaborate further on this point. First, propagation channel in the form of joint exposures to common risk drivers means that different financial institutions are becoming not so different. In other words, their investment strategies and methods for minimising regulatory capital were beginning to copy one another.