Insurers Need to Step Up Risk Efforts

In anticipation of the new Solvency II regime, as well as the eventual merging of the broader formal accounting rules policies from both the United Kingdom and United States, insurers need to strengthen their risk cultures. So says a report issued by global professional services firm Towers Watson, which recently measured the temperature of more than 80 delegates from a wide range of insurance companies.

The poll, conducted during a recent Solvency II seminar, revealed that only 29% of insurers measure and manage risk culture in their organizations as part of their ongoing risk assessments.

Historically, risk culture has had a significant impact on an insurer’s financial performance, and Towers Watsonresearch confirms this, noting that during the financial crisis, those insurers with weak risk cultures were hindered in their ability to improve business performance.

“Relying on processes and formalized controls is not enough to give regulators, and other interested third parties, confidence that an organization is capable of good risk management,” Oliver Davidson, senior consultant at Towers Watson, said. “There will always be ways to circumvent the models, systems and controls. It is therefore necessary for senior management to encourage a strong risk culture where employees are risk aware, understand the consequences of their decisions and are confident in raising objections when necessary.”

Some insurance companies reported taking steps in strengthening the risk culture of their organizations, such as by forming risk committees; strengthening the role of the CRO; or by adjusting senior management incentive plans to have a greater element of risk focus.

“We see Solvency II as an opportunity to make a step change in risk culture within insurance companies," Davidson said. "Central elements that we expect from an effective risk culture include committed leadership, effective governance structure with clear responsibilities and timely challenges, active learning from mistakes, incentives that reward thinking without the risk management objectives of the whole organization. While it is encouraging to see some leader firms taking proactive steps to build a solid risk culture, for many more work is required.”

Carriers will face additional challenges in terms of how risk culture is measured, notes Towers Watson. In similar fashion to measuring other aspects of a carrier’s operations, measurement of risk culture requires diagnostic tools that comprise a set of survey questions that are geared to measure key aspects of risk culture in a financial services context.

“The best way to understand risk culture within an organization is to engage directly with those employees who are involved and to capture free and frank views by using a survey," Davidson added. "This can provide a rich source of data using standard and bespoke questions which can be analyzed. It will help foster a cycle of continuous improvement by allowing management to benchmark against other organizations, track own performance over time and provide results at a sufficiently granular level so that remedial action, if necessary, can be applied.”