While insurers are adopting enterprise risk management to comply with ratings agencies' standards, many companies don't see ERM as being embedded or even relevant, according to an industry study.
The research by PricewaterhouseCoopers found that many insurers and other financial services organizations are questioning the effectiveness of ERM and its ability to deliver a return on investment, or meet the expectations of stakeholders.
ERM is generally described as an approach to identifying, defining, quantifying and treating all risks throughout an entire organization, whether insurable or not. ERM, unlike traditional risk management, deals with all types of risk, such as operational risk, credit risk, financial risk, hazard and event risk.
PwC's survey of insurance company executives in the United States and North America, Europe, Asia-Pacific and Bermuda, was titled "Does ERM Matter? Enterprise Risk Management in the Insurance Industry."
According to the report, while more than 90 percent of survey respondents have ERM programs in place and see it as an opportunity to improve decision-making and increase shareholder value, fewer than half are confident that ERM has been embedded into their strategic planning, resource allocation and performance management functions.
Despite progress, the study found that ERM in many cases is not relevant or clearly understood by business teams. It is not fully embedded into strategic decisions and its integration into day-to-day decision-making and frontline risk-taking within many insurance companies remains limited. This potentially undermines its ability to deal with a more complex risk environment and more exacting stakeholder expectations.
The survey asked whether ERM is a boardroom priority across the industry. In response 66 percent strongly agreed, 23 percent slightly agreed and about 40 percent of respondents stated their firm has a board-level ERM committee.
The role of the chief risk officer (CRO) is also gaining in stature with about 60 percent of firms saying their CRO communicates directly with the board on at least some risk management issues.
"It is likely 2008 will provide an immediate challenge to the efficacy and organizational relevance of ERM as insurers face market and economic stress," Paul Horgan, PricewaterhouseCoopers' global insurance risk management leader, said in a statement.
He added, "Within this challenging environment, effective ERM could help companies to sustain investor confidence, identify commercial opportunities and allocate scarce capital where it can earn its best risk adjusted return."
The report, a followup to an earlier study published in 2004, found that:
o Procedures for monitoring and control are often still orientated around separate risk/business silos, making a portfolio view of risk difficult to sustain. While most insurers are at least "fairly confident" (and 44 percent are "very confident") that they have clearly defined their risk appetite, critically, the alignment of risk appetite and key business decisions is often limited.
o ERM effectiveness is often hindered by poor risk information and analysis. Many respondents also recognize that their risk and data systems are still patchy. According to the survey, fewer than 40 percent of respondents believe their firm's risk data and systems are "good" or "excellent," only a marginal improvement from 2004. Communication and escalation of risk information were also highlighted as areas of weakness.
o Attracting and retaining talent is critical. The survey found that good people are critical to developing the status and effectiveness of ERM. Few respondents felt able to answer the question about the industry's ability to attract, hire and train competent risk managers.
The survey reported a strong commitment to ERM among insurers but said if they want to take ERM to the next level, they need to develop a much stronger, firmwide understanding of its mission and objectives; a clearer allocation of appropriate roles and responsibilities; and the ability to leverage risk management capabilities that already exist within the company.
The survey includes responses from 53 insurers representing a balance of life, non-life and multiline insurance companies, along with a selection of reinsurers from Europe, North America, Asia Pacific and Bermuda.
A copy of the full report, executive summary and key findings are available for download at http://www.pwc.com/insurance.
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