Enterprise risk management, a “buzz word” throughout much of the 1990s, is something that will now truly have a significant impact on reinsurers over the next several years, according to Michael Shumrak, senior vice president and CFO with Scor Global Life U.S., Dallas.
In fact, Scor is placing increasing importance on ERM because it examines how the risks of each of its business silos impacts the risk of the company as a whole. The reinsurer currently is examining entering the market for reinsuring variable annuity guarantees and is using ERM as part of this examination, Shumrak notes.
The “missionary years” of talking about ERM, which is akin to traditional risk management with an added “E” for enterprise, is becoming more real as factors such as a new emphasis placed on it by rating agencies as well as global accounting standards become more important, Shumrak explains.
The “E,” he explains, looks at how risk affects an organization as a whole, not just in relationship to specific business lines.
Among the reasons why ERM will be important going forward are the potential ratings impact on both the reinsurer and on any direct writers that it works with; the ability of a direct writer to get reinsurance if ratings are impacted because of ERM; and the price that a direct writer will be able to buy reinsurance.
ERM is also important because it can affect a company’s embedded value, a type of appraisal that looks at the present value of distributable earnings in force and possibly earnings from the current year’s sales, he explains.
As international accounting standards, which could require liabilities to be valued, advance, securitization may be used more, and consequently, embedded value will be more important, Shumrak says.