Risk in­formed, not risk-based?

Insurance - - FEATURE -

Tra­di­tional com­pli­ance-based ap­proach: if you have the right rules, and enough of them, all will be well but the world is too com­plex – no ‘rules’ can guar­an­tee the healthy fi­nan­cial con­di­tion of an in­surer! Imag­ine a mo­torist driv­ing down a street late at night. Au­thor­i­ties have placed a red light at an in­ter­sec­tion in the mo­torist’s path, and de­ter­min­is­tic traf­fic reg­u­la­tions say the driver must stop re­gard­less of other traf­fic or the ac­tual risk that run­ning the light might pose to the driver or oth­ers. In a purely risk-based world, there would be no traf­fic light. Each driver would eval­u­ate the prob­a­bil­ity and con­se­quences of op­er­at­ing a ve­hi­cle in var­i­ous sit­u­a­tions, and con­tinue at speed through the light if the sit­u­a­tion is ‘safe enough’ or stop if the risk is too high. The driver’s ac­tions are based on the per­ceived risk com­pared to an ac­cept­able thresh­old, set by the au­thor­i­ties or de­ter­mined in­di­vid­u­ally by each driver. In a ‘risk-in­formed’ ap­proach, the reg­u­la­tors recog­nise the in­ter­sec­tion as a risky sit­u­a­tion that calls for ad­di­tional cau­tion so they have in­stalled a flash­ing yel­low light. A driver ap­proach­ing the in­ter­sec­tion must slow down and check for traf­fic in all di­rec­tions. The driver stops if nec­es­sary, or con­tin­ues through the light at a safe speed if the ‘coast is clear.’ The driver’s ac­tions are a con­se­quence of con­sid­er­ing ac­tual real-time risk (is traf­fic coming?) and fol­low­ing de­ter­min­is­tic reg­u­la­tions, i.e. the traf­fic laws gov­ern­ing the driver be­hav­iour at a flash­ing yel­low light. The chal­lenge for the in­dus­try is adopt­ing a risk-based ap­proach in a pru­den­tial reg­u­la­tory set­ting!

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