Stamford, Conn. – In the shadow of the economic downturn, insurance industry executives see technology as an enabler when it comes to managing risk. According to a recent survey conducted by Towers Perrin, a Stamford, Conn., global professional services firm, these same executives reported being among the most confident in their ability to manage risks and opportunities as compared with their counterparts in other industries. Yet leaders of companies that received “excellent” enterprise risk management (ERM) ratings from Standard & Poor’s tend to be significantly less confident in their overall ability to manage risks and opportunities compared with industry peers.

Conducted in conjunction with the Economist Intelligence Unit in the third quarter of 2007, the “Risk-Opportunity Survey” measured responses of nearly 200 insurance industry executives, including 69 whose firms have ERM ratings from S&P. Survey participants were optimistic and confident, seeing more opportunity than risk when they were asked to assess more than two dozen internal and external forces affecting business performance. In total, nearly 1,500 executives of mid- and large-size companies representing a cross section of industries from around the globe, took part in the Web-based survey, which focused on four categories of internal and external business forces: financial, people/workforce, operational and strategic.

According to survey findings, 52% of executives from the insurance industry said they are better able to manage risks than their peers, versus 51% of those leaders in other financial services and 47% of executives from the banking sector. Among all industry groups, only energy executives exhibited more confidence (54%).

Looking at specific risk categories, insurance executives were more confident about their ability to manage financial and people/workforce risks than all other industry groups, and among the most confident in their ability to manage operational and strategic risks.

However, executives from “excellent” rated S&P insurance firms tended to be less overconfident (36%) than their peers with either “strong,” “adequate,” or “weak” ratings (59%) in their ability to manage all risks and opportunities. Further, survey findings showed that only 14% of those companies rated “excellent” by S&P were more willing to accept risk than their industry peers, compared with 31% with lesser ratings.

“Executives throughout the insurance industry clearly see both sides of the coin when it comes to risk and opportunity, even in the face of unprecedented risks and a turbulent economy,” said Patricia Guinn, managing director of Towers Perrin’s Risk and Financial Services segment. “Research conducted by behavioral scientists has consistently shown that people are almost always more confident in their estimates and predictions than outcomes warrant. A major benefit of a successfully implemented ERM program is that it tempers the potential for overconfidence and helps drive correct decision-making–both in the ability to manage risk and seize market opportunities.”
Technology Key to Dynamic

Insurance executives see several industry dynamics as potentially greater risks than a year ago, including “business development” (71%), “customer” (62%) and “competition” (50%). Those same executives indicated the biggest opportunity, according to the survey, is in the area of “technology.” Seventy-one percent of executives said that industry dynamic represents the greatest opportunity versus a year ago.

Executives said technology is seen as an opportunity both in back office applications (i.e. claims processing and claims management) and front office applications (predictive modeling and strategic pricing).

In all four business force categories, insurance industry respondents see more opportunities than risks:

  • Financial issues, including cost of capital, interest rates, credit (76% vs. 66%)
  • People/workforce issues, including skills, attraction, engagement (74% vs. 61%)
  • Strategic issues, including business model, strategy, execution (72% vs. 60%)
  • Operational issues, including business processes and infrastructure (69% vs. 56%).

“Making good decisions requires a realistic view of what we know and what we don’t know,” said Prakash Shimpi, Towers Perrin’s ERM practice leader. “An ERM framework and the right tools for analysis can help executives make more informed decisions about what risks they want to avoid and whether they have the appetite to pursue opportunities to profit from certain risks.”
Among some other key findings when it comes to life insurance versus property/casualty firms:

  • The risk appetite of P&C companies appears to be higher than that in life companies, with 42% saying they are willing to accept risk, versus 21%.
  • People/workforce presents the most significant risks to P&C companies, with 58% of respondents indicating they see the issue as either potentially or very damaging.
  • Financial risks (72% potentially/very damaging) represent the most significant risks to life companies, the survey said.

“New risks and opportunities will continue to emerge,” said Guinn. “The challenge for all business leaders—whether they are in the insurance arena or in other industries—is to maintain a consistent approach to risk and opportunity management in both prosperous and challenging economic climates.”
Source: Towers Perrin

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