Driven by recent market events, the insurance industry is increasing its focus on integrating enterprise risk management into its day-to-day activities–a movement that is creating new challenges for corporate insurance risk managers.
ERM's ultimate goal is shared by all members of the business community. Without strong and healthy insurers, corporations that buy insurance could not operate effectively. Firms would function in a state of uncertainty without the critical backstop insurance offers in the event of catastrophes, which can take many forms.
ERM, however, can be a double-edged sword. It allows insurers to better understand how different types of exposures impact capital needs and forces them to emphasize loss volatility. This understanding, however, means clients with volatile loss experience may not only find an increase in pricing, but also less capacity.
This, in turn, translates into better pricing for buyers with a stable loss profile and a demonstrated ability to identify and mitigate their loss exposures. ERM will improve a carrier's pricing models, tempering the severity of hard markets but reducing the severe soft market price-cutting.
Risk managers will need to invest in understanding the intricacies of ERM so they can select strong insurers prepared to weather any business storm. ERM knowledge also will help them more effectively present the risks they are looking to cover in the insurance market–ultimately leading to better pricing, improved terms and conditions, and increased capacity.
The new ERM reality is not taking place in a vacuum. The globalization of the business environment and the recessionary conditions driving the economy are further pressuring the corporate insurance risk management profession. This confluence of factors should not be viewed as a threat, however, but rather as a significant opportunity to update and expand the boundaries of the risk management position.
Progressive insurance risk managers have already begun to diversify and expand their expertise. They are learning to become ERM interpreters for the C-suite and are taking a more proactive role in the organization in general, elevating the traditional "insurance buyer" role to that of "risk financer."
They spearhead efforts to reduce the total cost of risk through self-insurance and loss control, in addition to being responsible for maximizing insurance coverage while reining in premiums.
While many risk managers are leading the evolution–pushing the boundaries and expanding their role within their organizations–others have not yet risen to the occasion. Even progressive risk managers find there is work to be done. If they are to reach the level of a true strategic partner within their organization, they must transform into strategic business leaders.
To achieve this transition, risk professionals must develop new skills–some are technical, but many fall into the general business domain. Among them are:
o Continuing Education: The financial services industry is in a state of regulatory flux, with many standards changing in the insurance space. Under the ERM umbrella are a number of new frameworks including Europe's Solvency II regulations, economic capital modeling and risk-adjusted capital. It is vital risk managers educate themselves and stay current on such developing issues.
o Company Knowledge: Risk professionals must learn the ins-and-outs of their organization to develop and demonstrate the attributes that will best fit their culture and specific needs. They also must cultivate relationships with key players to promote risk management throughout the company.
o Communication: Risk managers who cannot properly convey ideas in concise and clear business language and show clear business results will have difficulty achieving the move to a leadership role. Facilitating transparency up and down the organization is paramount, and by taking on the responsibility of being the "ERM translator," risk managers can build stronger ties to senior management.
o Future-Oriented Thinking: Beyond simply monitoring market conditions, it is critical for risk managers to train themselves to think proactively and creatively. Perception and pragmatism are the keys to strategic action. While there are clear steps in mitigating the impact of accidents after they have occurred, leaders assist organizations in avoiding the missteps in the first place.
o Capacity To Influence: To move to the next level, risk managers must hone their ability to inspire, educate and coach. The best advice in the world will have no impact if no one is listening.
Risk professionals must determine the communication style that best fits their organization, and then pinpoint areas where their expertise and knowledge in identifying, measuring and prioritizing specific risks can have an impact.
The ultimate goal of this transformation is to have everyone in the company thinking and acting like a risk manager. True success is achieved when each individual serves as the eyes and ears of the organization, sharing information that allows the risk manager and the executive team to utilize capital effectively in programs that protect the employees, assets and shareholders of the company.
As organizations struggle to cope with one of the most challenging business environments in recent history, risk managers can be a source of stability and reassurance for their companies.
The complex nature of ERM creates a springboard for risk managers to demonstrate their ability as strategic advisers. Now is the time for risk managers to begin the transformation from insurance buyers into business leaders.
Bruce Zaccanti is a principal in the Insurance and Actuarial Advisory Services practice of Ernst & Young's Financial Services Office. Mr. Zaccanti, who is based in Chicago, may be reached at bruce.zaccanti@ey.com.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.