That the recent global financial crisis has put a spotlight on enterprise risk management (ERM) practices for financial service companies, including the insurance industry, is borne out by Towers Watson’s 2010 ERM survey. Most insurers recognize room for improvement in their ERM programs, especially given rising investor interest, looming Solvency II regulatory requirements in 2012 and ever-increasing rating agency expectations.
The global insurance industry witnessed two years of business turbulence following the onset of the financial crisis. This difficult period began soon after Towers Watson’s previous ERM survey, in which many companies reported finding it challenging to integrate effective risk management into their business.
The 2010 survey of 465 chief risk officers, chief financial officers and chief actuaries in insurance companies around the world has found that seasoned ERM practitioners are advancing in economic capital modeling and making ERM part of their decision-making process, while those less experienced continue to strengthen their ERM framework. Increasingly, insurance companies recognize risk appetite statements that link governance, metrics and risk modeling to risk and capital decisions as fundamental to a strong ERM program.
However, while there is ample evidence of insurers’ considerable progress during the last two years in ERM and economic capital development efforts, the industry still faces many challenges. The survey’s major findings regarding risk and capital management progress among insurers worldwide — information that can be useful in benchmarking your own company’s position, prioritizing ERM refinement and development efforts, and shaping future business plans — include the following:
• Insurance company risk management performance during the recent financial crisis was mixed. Traditional risk management techniques contributed the most to enhancing business performance over the past two years. While the majority of survey participants were satisfied with the performance of their ERM programs, nearly a third remain neutral, which signals more work to be done.
• Risk appetite is important to ERM success. Insurance company risk appetite statements continue to receive considerable attention: They have grown in overall prevalence, number of metrics and business impact. Formally documented risk appetite proves to be a key differentiator in insurers’ overall satisfaction with ERM.
• The business impact of ERM continues to grow. Increasing numbers of respondents say their ERM program has resulted in key business changes — primarily relating to formation of an asset strategy, followed by risk strategy or appetite, product pricing and reinsurance strategy for property & casualty insurers.
• A lack of resources is inhibiting ERM development. Across the industry, a shortage of skilled people resources is viewed as the top challenge to ERM implementation while, for large insurers, data quality and integration issues are the top obstacles blocking economic capital efforts.
• Convergence of economic capital methodology has slowed. While a one-year risk assessment period continues to be most popular, Solvency II requirements are driving regional differences, particularly for North American property & casualty insurers that use alternative methods.
• Solvency II proves challenging in Europe, and its influence is spreading. The pressure is mounting — as only 10% of European respondents subject to Solvency II believe their current models meet expected future regulatory requirements — and has spread, particularly in Asia and Bermuda.
The degree to which U.S. regulators will step up their ERM requirements remains to be seen.
This year’s survey asked insurance industry executives to indicate their top ERM development and risk management improvement areas for the next two years. Their top 10 responses follow, accompanied by key questions company executives need to ask themselves now if they truly expect to derive value from their organization’s ERM program:
1. Risk Monitoring and Reporting. Does our organization and governance structure foster regular and transparent risk monitoring and reporting to senior management and the board?
2. Risk Appetite Statement. Have we defined risk appetite and communicated this effectively to our key stakeholders?
3. Risk Limits and Controls. Have we adequately set limits for our top risks, and have they been linked to our corporate risk appetite through sufficient analysis?
4. Economic Capital Modeling. Do we have the capability to quantify the risks we take, and take sufficient note of the results?
5. Risk Governance Structure. Is our board sufficiently aware of and engaged in all relevant risk management issues?
6. Use of Economic Capital in Decision Making. Are capital allocation, asset strategy and reinsurance strategy decisions supported by analytics that include economic capital modeling?
7. Risk Culture. Does our culture and compensation structure support an appropriate balance of risk and reward?
8. Scenario Testing/Planning Capabilities. Do we have appropriate systems and processes in place to monitor and manage rapidly emerging risks?
9. Managing Individual Risk Exposures. Have we established risk owners who are accountable for managing and mitigating our top risk exposures?
10. Risk Resources, Skills and Capabilities. Do we have appropriate skilled resources, systems and processes to continually enhance our ERM program, and stay ahead of our peers and regulator/rating agency requirements?