S&P Exec Explains Ratings For ERM Practices

Out of 125 insurers and reinsurers, only 5% fall into the “excellent” category for their enterprise risk management practices, while 84% are “adequate,” according to Standard & Poor’s, New York.

David Ingram, senior director, insurance ratings for S&P and a speaker at its ERM summit here, explained that ERM is a “tailored process” that differs from one company to another.

He noted that once a company is reviewed, S&P forms an opinion. The opinion is summarized as “adequate,” “strong” or “excellent.”

Those rated “adequate” often have separate risk control processes “for each different risk that never talk to each other,” he said. To become a strong enterprise risk management company, “you need to have an overall vision that at least brings all your risks into the room at one time,” Ingram said.

He added that S&P is also looking for other things, such as clear vision of the company’s overall risk tolerance, including risk-control processes.

“We would expect a strong ERM company to have control processes for some of their risk that will actually give them competitive advantage in an adverse situation,” he said.

Such a company “either would not be exposed to as many of the negative events that occur in its industry, or when those events happen, it would “not suffer as large a loss because they have some preparation for that,” Ingram explained.

What trips up many companies is the ability to do strategic risk management, or overall risk-reward tradeoff. This is something that in the insurance industry “is only practiced by a small fraction,” Ingram said.