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Towers Watson: ERM Techniques Leads to Key Business Changes Among U.S. Insurers

Posted on 21 Feb 2011

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According to a recent survey conducted by Towers Watson on the use of enterprise risk management (ERM) in insurance companies, the proportion of U.S. respondents who say their ERM program has resulted in key business changes has increased significantly — from 75% in 2008, to 90% in 2010.

This trend is consistent with the growing maturity of more insurers’ ERM programs as processes, systems and results become more stable and better understood.

Over the past two years, the business impact of ERM has grown significantly among U.S. insurers. ERM programs have influenced major aspects of business decisions, including changes in asset strategy (44%), product pricing (42%), risk strategy or appetite (40%), reinsurance strategy (39%) and management decision-making processes (35%).

ERM in the Financial Crisis

What’s more, the majority of participants (61%) indicated that they were satisfied with how their ERM capabilities performed during the financial crisis, although 39% said they were neutral or dissatisfied with ERM performance.

The survey also showed that there are some fundamental differences in how various types of insurers are using ERM to guide their decision making.

For example, U.S. life insurers (71%), multilines (42%) and reinsurers (35%) are more likely to have changed asset strategy than P&C insurers (25%). Meanwhile, P&C insurers (44%) are more likely to use sophisticated risk modeling to assess the risk/reward trade-offs of their reinsurance program design and retained risk levels.

Increase in Use of Economic Capital

The use of economic capital in decision making has also increased across the board. Sixty-five percent of U.S. respondents are using economic capital (EC) in capital management decisions, while 53% are using it in reinsurance purchasing decisions. Further, 47% said they are using EC in strategic planning, while 46% are using it in setting asset strategy as well as supporting product design and pricing.
Other survey findings include:

    •    Risk appetite is important to ERM success. U.S. companies with a documented risk appetite statement are slightly more likely to be satisfied with the performance of their ERM capabilities than those lacking one (65% versus 59%).
    •    Resource availability is challenging ERM development. People challenges were noted as the greatest challenge to ERM implementation (cited by 58% of U.S. participants).
    •    Convergence of economic capital methodology has slowed. While a one-year risk assessment period continues to be most popular overall (54% of U.S. participants), only 42% of P&C insurers in the U.S. use this approach.

The survey, conducted in mid-2010, received responses from executives at 166 U.S. companies representing all lines of business.