While the U.S. insurance industry is making strides toward RiskManagement and Own Risk Solvency Assessment Model Act (RMORSA)readiness, a survey conducted by PwC shows a gap appears to existbetween the perception of RMORSA preparedness and the actualcompleteness of insurers' enterprise risk managementframeworks.

PWC has just released its 2012 U.S. Insurance ERM & ORSA Readiness Survey.

The RMORSA Model Act, which is in the process of beingimplemented in state law, requires insurers to manage acomprehensive ERM framework that is embedded within companyoperations by January 2015. While 82 percent of survey respondentsbelieve their existing ERM processes are largely adequate for therequirements, 38 percent of company boards are not engaged or areonly passively engaged in risk management, showing that riskgovernance may not be up to RMORSA standards. In addition, 35percent of companies indicated that they do not have a riskappetite linked to business strategy and financial goals, which iscrucial to a comprehensive and effective ERM program, according toPwC.

“Setting the risk strategy, implementing and validating acapital model and developing effective risk reporting capabilitiescould take a couple of years. Our survey shows that manyorganizations may be underestimating the amount of work it willtake to meet the RMORSA requirements” says Paul Delbridge, leaderof PwC's risk and capital management services practice. “Achievinga risk-aware culture through the organization will require allareas to understand their roles and responsibilities in relation torisk identification, measurement, mitigation and monitoring withinthe ERM framework.”

PwC's survey addressed the four main parts of an ERM programthat have direct influence on RMORSA preparation, namely riskstrategy, risk governance, risk management and risk quantification.Key findings in each of these areas include:

Risk strategy – 25 percent of companiesreported that risk appetite metrics are not part of the businessplanning process, while only 57 percent include some, highlightinga significant disconnect between risk management and strategicdecision-making. A quarter of companies do not have a risk-specificlimit framework to guide the business' compliance with riskappetite. A robust risk appetite and limits framework enhances riskgovernance and provides a platform on which to engage everystakeholder.

Risk governance – More than 30 percent ofcompanies do not have a dedicated chief risk officer, with threequarters of these insurers reporting that other positions cover therole, often on a part-time basis. The CRO or risk committees willbe largely responsible for compliance with the RMORSArequirements. A key component of successful ERM is a riskculture that involves the entire organization and fosters sharedresponsibility for risk management.

Risk management – 22 percent of companiesreported not having a formal process to address riskidentification, with most of these insurers adopting an informalone to address risk identification. A small minority reportedthat they do not have or do not see a need for a formal process.Moreover, many companies do not have fully documented risk policiesthat cover the significant risks to which they are exposed. TheRMORSA process is also an ideal opportunity to perform acomprehensive stress, reverse stress and scenario testing exercise.RMORSA should take place in conjunction with an organization'sbusiness planning process, leading to a high degree of coordinationbetween risk, underwriting, strategy, finance and compliancefunctions.

Risk quantification – 37 percent of companiesare not using an economic capital measure in addition to the moretraditional capital metrics of statutory capital, such as GAAP andrating agency capital. Economic capital models are very usefultools in risk management and risk aggregation, but even thoseorganizations that have them in place do not necessarily use theinformation to the fullest to make strategic decisions. Given thebusiness-critical uses to which capital models are put, RMORSArequires models to meet the highest quality standards, beappropriately calibrated and fully tested and documented.

“Preparation for this January 2015 deadline brings a greaterfocus on ERM by all insurers, encouraging them to move their RMORSAprocesses and ERM frameworks beyond regulatory compliance alone, tobecome more strategic and value-adding in nature,” says BrianPaton, director at PwC's actuarial and insurance managementsolutions practice.

About the survey

This 2012 survey is a continuation of PwC's two previous globalERM surveys, but exclusively targeted to the U.S. insurance market.The 65 survey participants comprised a mixture of life, P&C,and health insurance companies, covering U.S. headquarteredinternational groups, U.S. domestic groups or companies, U.S.subsidiaries of European groups, and U.S. subsidiaries of otherforeign groups.