New York — While the large majority of insurance companies today have enterprise risk management (ERM) policies, they are still being developed rather than fully integrated elements of the corporation. This is one of the findings of a new Ernst & Young LLP report released yesterday that illustrates a progress report on insurance risk leadership.

This third bi-annual survey of chief risk officers (CROs) delves into current and future ERM plans of major insurers and captures qualitative insights based on an in-depth discussion of the results at a recent senior executive roundtable.

"Insurers have made significant strides laying the necessary ERM groundwork over the last few years, creating a strong sense of optimism with respect to future plans," said Doug French, managing principal and insurance and actuarial advisory services leader, Ernst & Young LLP, a New York advisory firm. "However, insurers need to be mindful of not underestimating the work required to reach the ultimate goal of adding value to the business decision-making process. In many ways, the industry is just beginning to recognize the challenges ahead."

The Ernst & Young report is divided into three areas critical to improving insurance risk management: 1) risk organization and risk governance; 2) risk measurement, aggregation, reporting and monitoring; and 3) strategic management and decision-making.

Highlights of ERM challenges and opportunities include:

  • ERM goals and objectives — Three objectives currently drive risk management in the insurance sector: enhancing shareholder value, managing potential tail risk exposure and strategic decision-making.
  • Diffusion of risk ownership — Many companies indicated that the responsibility for the ownership, management and monitoring of specific risks is unclear and is spread across functions. Diffused risk ownership can result in unclear responsibility and accountability for risk strategy and appetite, and raises questions about the fundamental underpinnings of risk governance.
  • Impediments to integrating risk into the strategic decision-making process — The lack of risk modeling capability in terms of resources, sophistication and insufficient data was seen as the most significant barrier to achieving ERM today, and cited as a continuing challenge in the future. As ERM evolves, the ability to integrate risk into strategic planning will separate the industry leaders from the laggards.
  • Limitations of current risk reporting — The issue of emerging risks remains a crucial gap in most companies' ERM policies and practices. While they are working toward developing formal processes for identifying and handling emerging risks, the majority of insurers do not have such processes in place today.
  • Challenges to meaningful risk aggregation — The multiplicity of measures used across risk types suggests that linkages between risk appetite and tolerances and limits remain weak, preventing insurers from controlling aggregate risk exposures. Yet, CROs expect that in addition to managing day-to-day exposures at the corporate level, going forward, risk aggregation is likely to play an important role in capital management, communication of risk exposures and capital reduction required by rating agencies.
  • Economic capital as a business tool — Most companies are developing or have implemented economic capital (EC), and recognize its practical uses with respect to communicating exposures, setting tolerances and limits, managing tail exposure and making strategic decisions. CROs expect EC will become integral to capital management and risk-adjusted performance measurement, and 90% expect that, within three to five years, EC will be a key element in performance measurement.

A similar study conducted last year by the New York-based Tillinghast business of Towers Perrin, revealed that globally, external pressures are raising the bar for risk management. In that study, two-thirds of the insurance industry globally reported using EC as a risk quantification tool. This is a significant increase over 2004 where only half of the respondents indicated they were using EC.

While most companies globally (78%) cited "good business practice" as the principal driver for their risk management efforts, rating agency considerations were cited as a significant factor for North Americans (72%), whereas changes in insurance solvency regulations are a major driver for European Union insurers.

"As insurers continue on their ERM journey, it is important they take a step back at key points along the path in order to plot an appropriate course of action,” said Ernst & Young’s French. “With the basic building blocks in place, insurers are now at a critical ERM juncture. Moving to the next level will require a significant commitment, but organizations that make the investment will reap the rewards in the end as risk management will increasingly become a competitive differentiator."

Source: PR Newswire, Insurance Networking News’ archives

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