NU Online News Service, Sept. 27, 2:19 p.m. EDT
While progress has been made in the area of enterprise risk management over the last decade, there is still improvement to be made, according to A.M. Best Co.
In a special report, Oldwick, N.J.-based A.M. Best notes that economic-capital models, more sophisticated catastrophe management and dynamic financial analysis are among the tools U.S. property and casualty insurers have used over the past 10 years to step up implementation of ERM.
In 2010, A.M. Best says it started including an ERM section in its Supplemental Rating Questionnaire (SRQ).
According to the report, most rating units (groups rated by A.M. Best other than mortgage and financial guaranty insurers) have a chief risk officer or senior-level officer responsible for ERM. Of those companies, however, 12 percent—mostly small companies—say they have no CRO.
A.M. Best observes that while smaller companies may not be able to afford a separate function within the corporation to manage ERM, those companies should have an ERM committee responsible for reviewing enterprise risk.
It says that smaller companies could form these committees, using officers from the underwriting, claims, financial and actuarial functions.
Rating units identified the largest potential threats to overall financial strength by risk type, and estimated these threats’ financial impact as a percentage of group policyholders’ surplus. A.M. Best says it is concerned that 15 percent of respondents believe they have no liquidity risk at all.
A.M. Best says that while insurers may argue that liquidity risk can be a function of other risk factors (such as reinsurer default, shock and catastrophe loss), it believes that a company’s identification, management and measurement of liquidity risk should be evaluated on both standalone and enterprise-wide bases within the company’s overall risk management framework.
Most insurers—86 percent—responded that they define their risk tolerance at the overall level of the enterprise. But when asked to define this overall appetite or tolerance for risk, the SRQ results found that at least 90 percent of responses were too broad or general.
Most respondents say they use their economic-capital models to make key decisions on pricing, capital allocation and investments, but only 27 percent are using their economic-capital models to determine any portion of management compensation.
A.M. Best says it does not have a prescriptive process for how the P&C industry should approach ERM. Rather, it recognizes that each company’s approach to risk management must be tailored to its risk profile, which will determine its ERM framework.
Although the industry is making progress in its efforts to improve its ERM, A.M. Best concludes that the industry has a long way to go.
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