North American insurers ranked product pricing (51 percent versus 39 percent in 2010), risk strategy (48 percent versus 38 percent in 2010) and reinsurance strategy (44 percent versus 34 percent in 2010) as the areas of their business most impacted by their evolving enterprise risk management (ERM) programs, according to a new Towers Watson survey.

Towers Watson added that defining risk appetite and monitoring against it are the top short-term priorities (52 percent), following that, risk appetite definition (38 percent), risk limits and controls (37 percent) and economic capital calculation capabilities (36 percent) were top priorities among North American insurers.

“Our research provides insights into the challenges companies are up against with effective ERM implementation,” said Mark Scanlon, Life ERM practice leader for the Americas, Towers Watson. “Companies able to overcome these obstacles and continue investing in targeted areas of ERM are much better positioned to improve business performance, stakeholder value and long-term success.”

The challenges highlighted in the survey were embedding risk culture, which 82 percent of North American insurers rated as the most important aspect of an ERM end-state vision; also mentioned were advancing economic capital modeling and ORSA readiness.

Towers Watson notes that the potential of economic capital is yet to be realized. Fifty-eight percent of North American respondents said methodology was the main challenge in calculating economic capital. Fifty-eight percent also cited reliability of modeled results, and 62 percent management buy-in, as the top challenges for embedding the use of economic capital in business decision-making.

Meanwhile, over 81 percent of respondents said aspects of ORSA assessments would generate significant or moderate benefits, yet only 20 percent have outlined a road map for their project plan, 17 percent have educated their boards on new oversight responsibilities, and 12 percent have produced an initial ORSA “dry run” report.

“Successful companies will efficiently leverage their limited resources and focus their ORSA efforts on high-impact areas led by key risk mitigation, operationalizing risk appetite and embedding economic capital modeling into risk-based decisions,” said Eric Simpson, Property & Casualty ERM practice leader for the Americas, Towers Watson.

 The survey also noted that companies with well-advanced capabilities (greater than 75 percent complete) received vastly higher contributions to business performance.

Towers Watson outlined three ways ERM adds value for such insurers:

Helping to avoid surprises that may threaten a company’s franchise value

Better informing important risk/return business decisions in areas such as capital management, strategic planning, capital allocation and risk transfer

Reducing insurers’ capital requirements through enhanced regulator or rating agency perception (insurers demonstrating strong ERM practices and risk-based decision making to rating agencies can potentially derive benefits to their rating and capital requirements)

Of the 539 senior insurance executives who responded globally, there were 200 North American respondents—42 percent of which were P&C insurers, 26 percent life insurers, 16 percent reinsurers, 11 percent multiline insurers and 5 percent were listed as “other.”

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