PwC Report Advises Insurers On How To Weather Economic Crisis

"In taking ERM to the next level, companies will need to develop a clearer understanding of appropriate firm-wide roles and responsibilities; more timely reporting of relevant risk information to key decision makers; and an appropriate balance between reliance on risk models and management judgment," the report stated.

Firms also need to elevate the role of chief risk officers so they have a clear mandate to challenge risk positions and ensure action is taken, PwC recommended.

As further risk management strategies, the report suggested avoiding over-reliance on modeling and historical data points, and creating effective alignment between strategy, risk appetite, and regularly monitored risk limits.

Stress testing to ensure adequate liquidity should encompass not just historical events, but hypothetical events as well, according to the report. "Hybrid" events – scenarios that use historical market movements as a basis, but are not necessarily linked to a specific crisis – should also come into play during stress testing, the firm counseled.

Modern technology enables companies to reduce cost and increase customer satisfaction, the report noted, and PwC said 90 percent of the companies it regularly meets with have initiated or are contemplating the initiation of a claims transformation initiative.

But the report said, "these functions will not provide the value for investment by themselves." Data and vision play a role in determining the success of technology PwC said.

On data, the report said, "if a company is seeking to provide better self-service to a claimant and display claims status via the Web, there will be no status to display if the claims system does not house the requisite data…"

On vision, PwC said, "Too frequently, insurance companies buy technology and build their future vision around it…. Creating a vision and buying the technology with which to build the envisioned future should yield far greater returns on the investment."

When seeking cost reductions, the report warned, companies should understand what drives costs. For example, marketing and distribution cuts lead to lower sales, outsourcing complications adversely impact customer loyalty, compliance cuts increase exposure to litigation, and staff cuts lead to unacceptable cycle times.

The report recommended developing a "systemic understanding of the business that takes into account the changes resulting from the current financial crisis. Companies should prevent or quickly remedy drastic cost cutting tactics, it added.

"Moreover, well-defined ownership of and proper accountability for the decision-making process greatly facilitates effective cost reduction," the report said, and companies should determine clear ownership of and authority for decisions on cost reduction at proper levels in the organization.

Among other areas of concern mentioned, the report cited regulatory reform, including the prospect of federal involvement, and privacy and information protection – complying with privacy laws and regulation in a comprehensive and cost-effective manner.

Paul Veronneau, PwC U.S. insurance industry advisory services leader, said in a statement, "How insurers manage change amid this crisis in 2009 is likely to determine their long-term viability and success. The current ways of doing business are under tremendous stress, and only companies that are able to adapt to the new world are likely to survive."

He added, "The bright side is that companies are now being forced to strengthen their balance sheets, improve risk management and introduce operational efficiencies, and that will position the survivors to thrive in the long term."