Insurers around the world view their ERM performance as mixed, according to results of Towers Watson’s sixth biennial “Insurance Industry ERM” survey. Of the 465 insurance and reinsurance executives from North America, Europe, Asia Pacific and multiple regions responding to the survey, 58% reported being satisfied with their ERM capabilities over the past 18 to 24 months, while 31% were neutral and 11% dissatisfied.
Additionally, more than two-thirds of respondents noted that their risk management programs contributed to enhanced business performance in such areas as core risk control technologies and a strengthened risk culture. Participants cited management of individual risk exposures (69%), risk monitoring and reporting (65%) and risk limits and controls (64%) as the top ERM areas contributing to enhanced performance.
Over the past two years, ERM programs have influenced major business aspects including changes in asset strategy (according to 52% of respondents), risk strategy or appetite (47%), product pricing (44%), and management decision-making processes (36%). However, there are fundamental differences across insurer categories. In particular, life insurers (61%), multilines (59%), and reinsurers (48%) are more likely to have changed asset strategy than P&C insurers (34%). Meanwhile, P&C insurers (43%) are more likely to have changed their reinsurance strategy using sophisticated risk modeling to assess the risk-reward trade-offs of their reinsurance program design and retained risk levels.
A lack of available resources¾people with the desired levels of skill and experience¾has contributed to slower than expected enhancement of companies’ ERM and economic capital capabilities. In total, people challenges were noted by 56% of respondents¾followed by data challenges at 45%¾as the greatest challenge to ERM implementation.
Despite these challenges, Tricia Guinn, Towers Watson’s managing director, Risk and Financial Services points out that considerable year-on-year progress being has been made by insurers in their ERM and economic capital development efforts; yet the industry still faces challenges.
“Towers Watson finds seasoned ERM practitioners progressing their economic capital modeling and uses for decision making, while less experienced ERM practitioners continue strengthening their ERM frameworks,” she says. “Further, formal risk appetite statements that link governance, metrics and monitoring to risk and capital decisions are increasingly proving to be fundamental to an effective ERM program.”
Insurers have done a great deal of work in developing and implementing corporate risk appetite and tolerance statements since 2008, with 59% of survey participants indicating that they have a documented risk appetite in 2010, up from 47% in 2008. Companies with a documented risk appetite statement were more likely to be satisfied with the performance of their ERM capabilities during the financial crisis than those lacking one (66% versus 47%), according to survey findings.
“This clear trend reinforces that risk appetite statements are becoming an integral governance steering mechanism for companies of all sizes as a means to effectively articulate and monitor the degree of risk that an organization is willing to take,” says Eric Simpson, SVP in Towers Watson’s reinsurance brokerage business. “As expected, there are also meaningful variations in insurers’ risk appetite readiness, with reinsurers and European insurers outpacing Asia Pacific and North American companies.”
European insurers also are keenly focused on regulatory capital and meeting other looming Solvency II requirements. In sharp contrast, North American insurers emphasize the risk of a ratings downgrade and rating agency capital given the significant market influence of these defacto regulators, particularly in the United States.
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