Study Finds Insurer Risk Management Lag

Those connected with the study said insurers were lagging in some respects when it came to risk management.

The report, PwC said, was also designed to help industry leaders understand the risks they face and align risk management strategies with corporate objectives.

PwC said its findings were based on research that included a series of in-depth interviews with leading experts in risk management in June and July of this year. Interviews were conducted with more than 20 senior risk executives worldwide at leading banks and insurers.

"There can be a tendency for risk to be concentrated into stand-alone silos," said Juan Pujadas, leader of the global financial risk management practice, PricewaterhouseCoopers in New York.

He added that many banks split risk into three "deceptively neat" areas?credit, market and operational risk, and set up departments to deal with each, "rather than accepting that many of these risks are interlinked."

Shyam Venkat, partner, financial risk management with PwC in New York, told National Underwriter that "it's ironic insurance companies were among the original risk managers, given the sort of business they happen to be in."

In terms of the emergence of risk management as a discipline that encompasses "both financial and non-financial risks and quantifiable and non-quantifiable risks," he said that in many respects "the discipline of risk management as a management function hasn't quite grown at the same pace in the insurance sector as it did in the banking industry over the last 10-15 years."

Reasons for this, Mr. Venkat said, include the fact that insurance companies are slightly different from banks "in that they have a much longer time horizon." Also, he said, the nature of insurance company risks tends to be different, most particularly on the actuarial side.

However, he noted, "There are definitely a lot of similarities in terms of market risks and credit risks." Insurance companies now realize "they are behind the banks and they need to try to bring about some of the same framework and apply it and customize it to their own risk profiles."

This can be accomplished, he said, by integrating management of all risks, including liability risks, in a unified framework.

Insurers "should take a broader, more holistic view" that allows for the "identification, quantification and management of risks in an enterprise-wide framework," he said.

Mr. Venkat added that insurance regulators typically have not addressed the area of risk management in the same way that banking regulators have. This, he said, is beginning to change, "particularly with cross-industry regulatory convergence."

The study found that in order to create the right framework for holistic risk management, corporate board management must make risk management a strategic priority. Management processes need to be set up to ensure that an awareness of risk informs corporate governance, decision-making, external reporting and compensation.

The "right enablers"?people and systems that facilitate risk management decisions?must be put in place to deliver the information upon which managers can base their decisions, the report concluded.

Mr. Pujadas, continued that, "In an environment where risks permeate every aspect of the enterprise and where low probability, high impact events are grabbing headlines with increasing regularity, ignoring them is not an option."

The study said organizations should regularly and objectively assess their own internal risk management framework. "Increased attention to the risks created through dealings with other institutions, whose risk management structures may not be as robust, are crucial," Mr. Pujadas said.

PricewaterhouseCoopers listed a variety of attributes it said are needed for a "world-class" risk management culture.

The firm said an awareness of risk and the need to manage should pervade the enterprise and risks should be identified, reported and quantified to the greatest possible extent.

It advised that equal attention should be paid to both quantifiable and unquantifiable risks, and their management should not be fragmented into compartments and silos, but rather made everyone's responsibility.

Those involved in monitoring risk, even non-financial risk, should have power of veto over new projects they consider too risky, the report found.

It also called on companies to avoid products and businesses they do not understand.

Scenario planning, the report said, should embrace uncertainty and factor all possible developments into decision-making.

The study called for monitoring of risk managers with internal audit procedures to ensure systems are running properly and the right results are being reported.

It advised that risk management should be recognized as a key contributor to value creation.

Finally, it called for a defining of the risk culture to give managers and employees maneuverability to deliver long-term growth and value.