In late-January, Bermuda-based insurance company XL Capital Ltd. found out the hard way that insurers' enterprise risk management (ERM) capabilities are coming under increased scrutiny. Both Oldwick, N.J.-based A.M. Best Co. Inc. and New York-based Fitch Ratings Ltd. slashed their respective ratings for XL’s P&C and reinsurance units, calling out inadequate ERM practices. In a statement, Best said the downgrade was the result of its opinion that “XL Capital's risk management controls are below expectations,” citing greater-than-expected losses resulting from the 2005 catastrophe season.

To keep carriers apprised of how ERM fits into its rating methodology, A.M. Best issued “Risk Management and the Rating Process for Insurance Companies,” which outlines how risk management is incorporated into the overall rating process.

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