Most ERM Programs Only 'Adequate'

Nearly two-thirds of insurers and reinsurers have instituted an "adequate" enterprise risk management (ERM) program providing a measure of their solvency, a rating firm study has found.

According to a new research report from Standard & Poor's in New York, 62 percent of 78 carriers the firm surveyed have the adequate rating, while 24 percent of the companies have a "strong" ERM plan.

ERM is described by S&P as a "subjective view of an insurer's or reinsurer's risk management practices, focusing on how its loss tolerance is defined and measured and on the processes it undertakes to ensure that this tolerance is not exceeded."

Among the factors S&P looks at are strategic risk management programs, risk and economic capital models that can provide timely information into a carrier's risks, and the overall risk management culture.

"For most insurers the ERM evaluation has had no impact on ratings," said S&P analyst David Ingram.

But for some companies the evaluation provided support for a rating decision, and for a few, it has contributed to a favorable rating action, he added.

There is no national regulatory agency or industrywide trade group that has established ERM criteria, although the European Union's Solvency II criteria are pending.

"Standard & Poor's is filling this void by incorporating ERM criteria into its ratings," Mr. Ingram said.

ERM tests are not a substitute for determining capital adequacy. "Rather, they are a larger measure of how well a company can muster all its resources--financial and otherwise--to understand and manage the risk it undertakes," Mr. Ingram said.

Good risk management practices do not necessarily translate into low earnings volatility, the report notes. "We have already deployed these criteria on dozens of different insurers and reinsurers of varying performance and have found only five with weak overall ERM ratings," Mr. Ingram said.