Nearly three-quarters (74 percent) of global insurers said that their executives and board members viewed the risk management function of their enterprise as an important strategic partner that added value to the business. Notably, carriers that shared this view were almost twice as likely to say they were satisfied (73 percent vs. 38 percent) with their company's enterprise risk management (“ERM”) performance compared to those that deemed ERM as merely a provider of risk assurance (18 percent) or for regulatory compliance (eight percent).
These findings came from Towers Watson's Eighth Biennial Global Enterprise Risk Management Survey.
Overall, insurers' satisfaction level with their ERM performance grew by 10 percentage points over the last two years (63 percent vs. 53 percent), highlighted by a 16-percentage-point increase in Asia Pacific (51 percent vs. 35 percent), although it was less pronounced in North America and Europe (with a seven-point increase). Insurers' opinions of their ERM program hinged on certain factors, such as clear links to business goals. In fact, carriers whose ERM function was well integrated into their business planning noted higher rates of satisfaction (82 percent) than those without an integrated strategic plan (53 percent). Similarly, those with a risk appetite framework linked to specific risk limits expressed higher rates of satisfaction (76 percent) than their peers with no framework in place (50 percent).
“Companies that strive for strategic value in their risk management function – as opposed to simply using ERM for regulatory compliance – typically differentiate themselves, in part, by integrating risk management into their strategic decision-making process from the beginning,” said Martha Winslow, the senior consultant of the Americas P&C practice at Towers Watson. “Too often, senior management incorporates risk management later in the process or even after it's complete, when there's not much chance of it influencing critical decisions.”
The survey demonstrated that regulatory requirements have played a key role over the last two years concerning how insurers approached their ERM. Over three-fifths (61 percent) of participants said it was the leading key driver of change, and this was especially true in Asia Pacific (72 percent) and Europe (63 percent) but less so in North America (47 percent). They also conveyed that their senior management teams and boards of directors had a strong interest for an improved ERM program to support good business practices (59 percent), as this ranked as the next most important catalyst for change.
“Traditionally, the business drivers prompting insurers to think more strategically about ERM have centered on losses or parts of the business requiring the company to fix something,” said Mike Wilkinson, Towers Watson's EMEA risk and Solvency II leader. “But now, as ERM continues to mature, we're seeing more positive drivers, such as how to maximize the limited resources a company has on a risk-adjusted basis.”
Challenges around regulatory-related issues (46 percent) slightly edged out people challenges (45 percent) as the top obstacle insurers expect to face for ERM implementation over the next year. Most U.S. participants (82 percent) expect changes in the regulatory system to have little or no impact on their capital requirements, although they do expect new regulations to trigger other changes in their business, such as an adjustment in the relative attractiveness of products (36 percent), higher prices (31 percent), and the need for capital raising (23 percent).
Almost four-fifths (78 percent) of respondents estimated that the ultimate vision for their company's ERM capabilities had increased over the past two years, and they cited risk culture (78 percent) and risk tolerance (76 percent) as the most important aspects of this ultimate vision. Pointedly, since the last survey, participants showed they had made progress toward reaching this end vision for every aspect of their ERM program, with the most headway gained in risk monitoring (75 percent vs. 59 percent) and risk tolerance (71 percent vs. 57 percent).
European insurers made more strides integrating ERM across most areas of their business compared to their North American and Asia Pacific peers. Insurers in Europe have integrated ERM into their capital adequacy assessment (70 percent) at a greater rate than their North American (51 percent) and Asia Pacific (45 percent) counterparts. This also held true for progress in the mergers, acquisitions, and divestitures (54 percent) segment of their operations, as well as business planning (59 percent), where North American (36 percent and 34 percent, respectively) and Asia Pacific (26 percent and 27 percent, respectively) insurers have lagged in those areas of ERM integration by comparison.
“Risk doesn't exist in isolation. It only exists as some part of the business. If your chief risk officer doesn't have a clear understanding of company objectives and the kind of risk/return balance needed to achieve those goals, you're not getting the most out of the program,” said Mr. Wilkinson. “But by taking a very strategic approach to risk management, insurers can often sidestep some of the risks they're exposed to or the risks inherent in the opportunities they want to pursue.”
Learn more:towerswatson.com.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].