Alex McNeil is the Maxwell professor of mathematics at Heriot-Watt University, Edinburgh. He was formerly assistant professor at ETH Zurich. Professor McNeil has a BSc from Imperial College, London, and a PhD in mathematical statistics from Cambridge University. He has published papers in leading statistics, econometrics, finance, and insurance mathematics journals and is a regular speaker at international risk management conferences. He is joint author of the book Quantitative Risk Management: Concepts, Techniques and Tools (2005). Professor McNeil is the director of the Scottish Financial Risk Academy, which aims to provide financial service companies with an efficient, streamlined framework for exploring complex issues of risk and related topics, in partnership with academia.
In 2010 you were instrumental in the setting up of the Scottish Financial Risk Academy, a forum for academics with expertise in risk management, to work with the finance sector to enhance the understanding of various forms of financial risk. How has that progressed?
In September 2011 the Scottish Financial Risk Academy held its third biannual colloquium, where we had speakers from academia, industry, and regulatory bodies. The focus of the colloquium was Solvency II, the new regulatory standard for the insurance industry. The implementation date for Solvency II is 2013, and institutions across the sector are currently involved in trying to understand both how Solvency II will affect them specifically, and in looking at a number of outstanding issues with Solvency II that have yet to be resolved. What came out of the colloquium was a clear sense that there are still one or two ongoing challenges with Solvency II. We looked at the outstanding technical issues and how they might be best addressed.
In particular there are a lot of questions about MCV, or market-consistent valuation. There are well-known concerns from the regulator on the procyclical effects of marking to current value, where you mark up the value of your liabilities when interest rates are low and mark down the value of your assets in falling markets. The net effect of this when you have a situation such as we saw in October 2011, when falling markets were accompanied by continuing ultra-low interest rate regimes, is of course to make the solvency position of any institution look considerably worse than it might turn out to be. The risk is that the view provided by marking-to-market may prompt dramatic interventions on issues that may well not require action. One result could be that a regulator could end up calling for capital ratios to be enhanced at exactly the time when this would hurt firms the most.