Out of 125 insurers and reinsurers, only 5 percent fall into the "excellent" category when it comes to the quality of their enterprise risk management practices, while 84 percent are "adequate," according to Standard & Poor's.

David Ingram, senior director of insurance ratings for Standard & Poor's and a speaker at S&P's ERM summit last month in New York, 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 that is summarized in one word--either "weak," "adequate," "strong" or "excellent."

Those rated "adequate," he explained, often have separate risk-control processes "for each different risk that never talk to each other."

To become a strong enterprise risk management company, "in our opinion, you need to have an overall vision that at least brings all your risks into the room at one time," according to Mr. Ingram.

He added that S&P is also looking at other factors, such as whether there is a clear vision of the company's overall risk tolerance, the "so-called risk profile," and "better than average" risk control processes.

"We would expect a strong ERM company to have control processes for some of its risk that will actually give it a 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 [it has] some preparation for that."

What trips up many companies is the inability to do strategic risk management, or make an overall risk-reward tradeoff. This is something that in the insurance industry, "is only practiced by a small fraction," he said.

Insurers that fall into the "excellent" category are those "that have been strong and have been operating with a strong [ERM] basis for a long period of time and have well-developed platforms they are continuing to refine," he noted.

Mr. Ingram explained that as of Oct. 31, 2007, S&P totaled its opinions and found that "the adequate category very much dominated."

Three percent fell in the "weak" category, 5 percent in the "excellent" category, and 8 percent in the "strong" category, leaving 84 percent in the "adequate" category.

He acknowledged that the "massive" adequate category is not uniform and forms a continuum. At one end are the weaker companies "that just barely have control structures in place," while at the other end of the spectrum are companies "in the middle of major development projects enhancing their ERM capabilities."

Examples of "excellent" ERM companies include Genworth, Manulife, Partner Re, Renaissance Re, Travelers and USAA, he noted.

Those in the "strong" category include ACE, Aetna, Berkshire Hathaway, Chubb, Endurance, Hartford, MetLife, Nationwide, Platinum, Progressive and Sun Life.

On the positive side of the "adequate" list are those companies that "we think in one-to-three years will be moving into the 'strong' category, because they have most of what it takes to be strong and have shared with us specific plans to develop the pieces they don't have," he said.

These include Allstate, Ameriprise, Axis Capital, New York Life, Principal, Prudential and XL Capital, he noted.

Mr. Ingram said some of the companies listed as adequate are silo-based, "and therefore missing the advantages that ERM has to offer."

He said that one company--Manulife--had a strong ERM program that was instrumental in moving the carrier's rating to "triple-A" last year.

ERM is an evolutionary process, Mr. Ingram noted, and as companies continue to enhance their ERM programs, S&P enhances its ERM rating processes.

"This two-year journey we've been on was started with publishing broad criteria," he said. Six months later S&P released an enhanced document with more specific details. "We published our findings of ERM, and we keep explaining and improving our process as it moves along," Mr. Ingram said.

Special Reports /

S&P Finds Most Insurer ERM 'Adequate'

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