NU Online News Service, Oct. 27, 3:40 p.m. EDT
The movement toward stronger enterprise-wide risk management (ERM) practices following the 2008 financial crisis has continued gathering steam among insurers and reinsurers this year, according to a new study.
The report, published today by Guy Carpenter & Company, LLC, is titled “Update: Risk Profile, Appetite, and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness.”
It concludes that (re)insurers are increasingly disclosing their metric-based risk tolerances, used as frameworks for their capital models as key tools in their risk management arsenal.
In the six months since Guy Carpenter’s initial Risk Tolerance Benchmarking study, published in April 2009, rating agencies were found to have accelerated their emphasis on ERM-related disciplines, with the goal of greater transparency.
At the same time, shareholders and boards of directors have increased their calls for more effective corporate governance through improved quantification and evaluation of risk and more efficient deployment of capital, the report said.
Susan Witcraft, Guy Carpenter managing director, said in a statement, “Across the industry, we are seeing greater understanding of the basic concepts of enterprise-wide risk and a growing consensus that ERM is a critical component in making strategic business decisions and more effectively deploying capital.”
She noted that with the continued rise of metric-based frameworks, companies are becoming better positioned to respond to internal and external questions about risk and capital while increasing their internal efficiency and maximizing returns.
Iain Boyer, chief administrative officer of Americas Broking Operations, said, “The combination of regulatory, capital market and legislative influences that we noted in our April briefing continues to exert pressure on management to better recognize, quantify and manage risk. As we emerge from the financial crisis, staying apprised of the latest disclosure trends, capital models and ERM methodology will be critical to success in a rapidly changing marketplace.”
Guy Carpenter’s ERM study, using publicly available data, identified information from 12 (re)insurance companies domiciled in Europe, six in the United States, nine in Bermuda and eight in the Asia-Pacific region.
In risk tolerance, study findings concluded:
o Public disclosure of companies’ risk tolerances remains somewhat limited.
o Companies have generally continued to increase disclosure related to their method and manner of establishing risk tolerance, but not the resultant amount or implied level of capital adequacy.
o The most prevalent disclosed risk tolerance methods continue to be Value at Risk (VaR) and stress testing.
The updated survey indicates little change from year-end 2007 to year-end 2008 in the level of disclosure of ERM structure characteristics, such as having a chief risk officer, reporting relationships, a risk committee, or reporting lines into the board, according to Guy Carpenter. The exception to this consistency is in Bermuda, where the level of structural disclosure has increased.
In the previous survey, Guy Carpenter found that European companies tended to disclose more structural ERM information than companies in other regions, with Bermuda and Asia-Pacific companies previously disclosing the least about their ERM structural elements.
In the updated survey, however, Bermuda companies are now found to be relatively close to European (re)insurers in their level of structural disclosure. Asia-Pacific and the United States continue to lag behind their European and Bermudian peers.
o Driven by Solvency II, the disclosure of capital allocation and modeling method at the group level continues to be most prevalent among European (re)insurers.
o There continues to be little variance between insurers and reinsurers regarding the overall quality of disclosure.
o Combined operations that include both insurance and reinsurance within their corporate structures tend to provide greater detail in disclosures and descriptions of the risk and capital models for their insurance, market/asset and credit risk.
The report is available at www.gccapitalideas.com,