A report released by Ernst & Young LLP indicates that while a large majority of insurance companies now have enterprise risk management (ERM) policies, these policies are often not fully integrated elements of the corporation.
"Insurers have made significant strides laying the necessary ERM groundwork over the last few years, creating a strong sense of optimism with respect to future plans," said Doug French, Managing Principal and Insurance and Actuarial Advisory Services Leader, Ernst & Young LLP. "However, insurers need to be mindful of not underestimating the work required to reach the ultimate goal of adding value to the business decision-making process. In many ways, the industry is just beginning to recognize the challenges ahead."
The goal of ERM policies are to enhance shareholder value, manage potential tail risk exposure and provide knowledge for strategic decision-making. The basic promise of an ERM policy, as with any risk management strategy, is to help insurers better analyze the properties and clients they insure, which in turn helps insurers manage their claims payouts better.
According to the report, ERM poses several challenges and opportunities to insurance companies, including:
?Impediments to integrating risk into the strategic decision-making process- The lack of risk modeling capability in terms of resources, sophistication and insufficient data was seen as the most significant barrier to achieving ERM today and cited as a continuing challenge in the future.
?Limitations of current risk reporting- The issue of emerging risks remains a crucial gap in most companies' ERM policies and practices. While they are working toward developing formal processes for identifying and handling emerging risks, the majority of insurers do not have such processes in place today.
?Economic capital as a business tool- Most companies are developing or have implemented economic capital (EC) and recognize its practical uses with respect to communicating exposures, setting tolerances and limits, managing tail exposure and making strategic decisions. CROs expect EC will become integral to capital management and risk-adjusted performance measurement, and 90% expect that, within three to five years, EC will be a key element in performance measurement.
"The first step toward achieving any goal is gaining a true picture of the obstacles that must be faced so a realistic plan of action can be put in place," said French. "As insurers continue on their ERM journey, it is important they take a step back at key points along the path in order to plot an appropriate course of action. With the basic building blocks in place, insurers are now at a critical ERM juncture. Moving to the next level will require a significant commitment, but organizations that make the investment will reap the rewards in the end as risk management will increasingly become a competitive differentiator."
To receive a copy of the report, please contact Deanna Decker at 212.752.8338 or [email protected] or go to www.ey.com/us/actuarial.
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