A Web-based survey at the onset of the credit crisis last year found insurance executives very confident about their ability to manage risks and opportunities–an attitude mirroring their counterparts in banking and other industries.

However, firms with good enterprise risk management were found to have less unfounded confidence, according to the global study by Stamford, Conn.-based consulting firm Towers Perrin and the Economist Intelligence Unit.

Towers Perrin said it determined that insurance executives were among the most confident sector, which it called “not surprising, given that they are in the business of risk.”

But “with the experience of hindsight,” the firm said many of the organizations polled in the 2007 third quarter either underestimated risks or completely missed them, “especially in the financial services industry.”

Towers Perrin said while optimism and confidence are desirable traits in business leaders, the level of confidence held at the time of the survey was unjustified.

Seventy-nine percent of insurance executives polled said they were confident in their ability to manage financial and people/workforce risks. The next most confident group at managing financial and people/workforce risks were bankers–76 percent of whom said they were confident.

Towers Perrin said, however, that leaders of companies having “Excellent” enterprise risk management ratings from Standard & Poor's tended to be significantly less overconfident in their overall ability to manage risks and opportunities, compared with industry peers with lesser ERM ratings.

ERM is the process of planning and managing the activities of a business to minimize not just risks associated with accidental property or liability losses, but also financial, strategic, operational and other types of exposures.

“The findings and timing of this study–especially within the context of the onset of the current credit market woes and broader economic landscape–underscore the challenges the insurance industry faces in managing risk and opportunity,” said Patricia Guinn, managing director of Towers Perrin's Risk and Financial Services segment, in a statement.

In hindsight, Ms. Guinn said, “many organizations in all business sectors underestimated risks or completely missed emerging risks, and the levels of optimism and confidence…were not justified.”

Two hundred insurance industry executives were among the nearly 1,500 senior business executives who participated in the broad survey, that included banking, energy, other financial services, professional services, manufacturing, health care, high tech and the public sectors.

Sixty-nine of the insurance executives were at firms that have ERM ratings from S&P. The study sought to reveal what senior business managers consider the greatest threats to achieving their business goals, the most significant opportunities, and how confident they are in their ability to manage the risks and exploit the opportunities.

Ms. Guinn noted that behavioral scientists' research has shown consistently that people are almost always more confident in their estimates and predictions than outcomes warrant. A major benefit of a successfully implemented ERM program is that it “tempers the potential for overconfidence and helps drive correct decision-making–both in the ability to manage risk and seize market opportunities,” she said.

According to survey findings, 52 percent of executives from the insurance industry believe they are better able to manage all risks and opportunities than their peers, versus 51 percent of those leaders in other financial services and 47 percent of executives from the banking sector. Among all industry groups, only energy executives exhibited more confidence (54 percent).

Looking at specific risk categories, insurance executives were found among the most confident in their ability to manage operational and strategic risks.

However, executives from “Excellent”-rated S&P insurance firms tended to be less overconfident (36 percent) than their peers with either “Strong,” “Adequate,” or “Weak” ratings (59 percent) in their ability to manage all risks and opportunities.

Further, survey findings showed that only 14 percent of those companies rated “Excellent” by S&P were more willing to accept risk than their industry peers, compared with 31 percent with lesser ratings.

The survey found that among insurance company executives in the property-casualty market, the percentage of those who had more willingness to accept risk were double those in the life sector–42 percent versus 21 percent.

The survey found that insurance executives see several industry dynamics as potentially greater risks than a year ago, including “business development” (71 percent), “customer demand” (62 percent) and “competition” (50 percent).

Those same executives indicated the biggest opportunity, according to the survey, is in the area of “technology.” Seventy-one percent of executives said that industry dynamic represents a greater opportunity versus a year ago.

Executives said “technology” is seen as an opportunity both in back-office (such as claims processing and claims management) and front-office applications (such as predictive modeling and strategic pricing).

Among insurance companies, those competing on product innovation were found to be the most risk-aggressive, while those competing on customer service and product quality were the least aggressive.

Special Reports /

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