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Survey: Insurers making progress in boosting ERM program effectiveness

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A large majority of insurers worldwide now view risk appetite and risk tolerance statements, both key components of enterprise risk management, as highly important to their companies’ ERM programs, according to new research.  

So concludes the global professional services firm Towers Watson in its 8th biennial survey of global enterprise risk management. The report gathered responses from senior executives at major insurers worldwide about the approaches to, and current status of, their companies’ enterprise risk management (ERM) activities.

The report records a 15-point increase compared to 2012 (76 percent versus 61 percent) in the percentage of executives who give high ranks to risk appetite/tolerance statements. Only risk culture (78 percent) ranked higher in importance.

Yet insurers said that further improvements to their risk appetite and risk tolerance statements are needed. More than half (57 percent) expect to make changes to both in the next two years.  

“According to our research, insurers have made significant progress in the development of their risk appetite, which has laid the foundation for links with business operations,” says Mike Wilkinson, Towers Watson’s EMEA Risk and Solvency II leader. “This is encouraging, as a meaningful risk appetite is critical to really build your ERM framework into a useful tool for the business.

“Risk appetite metrics with risk limits help bring the framework to life for day-to-day risk taking, which has an extra impetus in Europe as Solvency II is implemented,” he adds.

The report indicates that most respondents (84 percent) have a documented risk appetite statement. This compares to 74 percent in 2012 and 59 percent in 2010.

Insurers have also made incremental progress with their risk limits: from 82 percent to 88 percent uses them to govern daily risk-taking. This compares to smaller percentages (73-81 percent) in 2012. However, significant work is planned, with over half (55 percent – 65 percent) expecting further development to their risk limits in the next two years.  

Fewer than half respondents (47 percent) say they have set up processes for external communication of risk exposure against risk appetite, while more than half (57 percent) indicate additional work is needed.

The survey noted an increase in respondents’ internal processes for monitoring exposures against risk appetite (78 percent) compared to 2012 (68 percent), while most carriers (81 percent) plan to expand in this area. Seventy percent say substantial work is needed for the top-down, bottom-up consistency of risk limits and risk appetite.  

Risk appetite is complex, particularly when an insurer has to consider all its different risk types and potentially a range of very different businesses,” says Wilkinson. “Carriers must understand the impact of risk aggregation and diversification on the overall risk profile of a business. The risk appetite also needs to adapt to changing market dynamics to create an effective risk/reward decision-making process.”  

Among the report’s additional findings:

  • Most respondents (95 percent) say reporting systems that provide relevant, robust and timely information are highly (57 percent) or moderately (38 percent) important for their ERM program end-state vision,

  • Only 49 percent are more than halfway to their end-state vision for the allowance of risk within business processes, while 39 percent are less than halfway toward their end-state vision for economic capital calculation.  

  • Though most (87 percent) insurers agree economic capital is an important metric, its use hasn’t grown much. Two-thirds (67 percent) of carriers say they currently calculate economic capital, compared to 64 percent in 2012.

For insurers that do calculate their economic capital, the survey distinguished trends regarding their primary measurement vehicle. The findings showed that insurers’ use of a one-year risk assessment period and tail value at risk has grown, while the use of value at risk has reduced.