Driven in part by increased demands from regulatory and rating
agencies, enterprise risk management (ERM) has become integral to
insurers' business processes around the world. Sixty percent of survey
respondents explicitly factor risk management considerations into
their decision-making, according to the fourth biennial survey of risk
and capital management practices among insurers worldwide by the
Tillinghast business of Towers Perrin.
The 2006 study focuses on a number of issues including risk
measurement, quantification competencies, how companies calculate and
use economic capital (EC), risk reporting and areas where the global
insurance community is seeking to improve their risk management
capabilities. In addition, a special section has been included that
focuses on the impact of Solvency II on the European community.
Other key findings from the study:
-- External pressures are raising the bar for risk management
globally. While most companies globally (78%) cite "good
business practice" as the principal driver for their current
risk management efforts, rating agency considerations are a
significant factor for North Americans (72%) whereas changes
in insurance solvency regulations are a major driver for
European Union insurers.
-- Two-thirds of the insurance industry globally uses EC as a
risk quantification tool. This is a significant increase over
2004 where only half of the respondents indicated they were
using EC. A further 19% of the participants indicated they are
considering the use of EC.
-- Insurers are using a diverse set of risk metrics. Insurers
assess the impact of risk on their capital, value and earnings
in a variety of ways, with 63% using at least three differing
measures. The most common are statutory or regulatory capital
and surplus (56%), economic value (42%) and GAAP or IAS
measures (38%).
"Companies are clearly more disciplined in their use of ERM today
than ever before, as catastrophic events, capital efficiencies and
competitive pressures have driven companies to adopt less of a
'seat-of-the-pants' approach to risk issues," said Managing Director
Tricia Guinn, who oversees both the Tillinghast and Reinsurance
businesses of Towers Perrin.
Risk Management Raises Its Profile
"As risk issues have gained importance, so has the role of the
chief risk officer," said Prakash Shimpi, Practice Leader with global
responsibility for ERM. "Insurers are not only examining risk more
closely, but they are also holding executives more accountable for the
results." Almost half of the respondents (43%) report having a chief
risk officer (CRO) with primary responsibility for risk management, up
from 39% in 2004 and only 19% in 2002.
The study also indicates that risk management is gaining
importance in board rooms, with nearly all respondents (92%) reporting
on risk to their board of directors at least annually, up from 84% in
the 2004 survey. 53% of all respondents report at least quarterly to
their board. Risk reports to senior management have become a common
practice, with 39% reporting monthly and another 35% reporting
quarterly.
Risk reporting varies regionally:
-- Bermudian (89%) and Canadian (82%) insurers are more likely
than U.S. or Asia/Pacific companies (53% respectively) to
report quarterly on risk to their boards.
-- European life insurers (65%) and p/c insurers (60%) are twice
as likely to report to senior management monthly as their
North American counterparts (31% respectively).
Solvency II Shapes Risk Management
European insurers generally agree that the new Solvency II regime
will require significant improvements to their risk management
capabilities, including enhancements to risk quantification
capabilities (63%) and enhancements to actuarial and accounting tools
(59%). However, there are markedly different results between
continental Europe and the U.K. in their approaches to Solvency II
which is not surprising given the U.K.'s ICAS regime:
-- Enhance risk quantification capabilities (76% continental
Europe, 41% U.K.)
-- Enhance risk governance and organization (61% continental
Europe, 19% U.K.)
-- Improve risk identification capabilities (52% continental
Europe, 15% U.K.)
"U.K. insurers clearly feel better placed as a result of
regulatory changes introduced by the FSA in advance of Solvency II.
Their focus is now on developing the right tools to suit the new
environment," said Ian Farr, Principal. "The increased risk
sensitivity and flexibility of Solvency II provides will trigger
greater product innovation, more innovative capital management,
capital raising and financing structures."
Room for Improvement
While ERM has made significant progress in recent years, there are
still growing pains:
-- Most respondents (77%) are highly focused on improving risk
measurement and quantification processes to enhance their
overall ERM efforts, particularly in the U.K. (97%) and Japan
(95%).
-- Respondents are generally not satisfied with their current
capabilities in many of the risk management areas they see as
important. They are significantly dissatisfied with their
ability to quantify operational risks and their ability to
reflect risk in performance measures.
"Insurers now recognize the potential impact a single event like a
security breach or systems failure can have on their operations, as
well as on their financials. Operational risks can be complicated and
difficult to quantify, so many are turning to scenario analysis to
achieve meaningful results," said Shimpi. "We expect operational risk
modeling and management practices to steadily improve over the next
few years."
Economic Capital as a Key ERM Tool
The survey also found that many insurers are moving toward the use
of economic capital (EC) as a risk management tool. As stated
previously, nearly two-thirds (65%) of all respondents calculate EC
and an additional 19% said they are considering calculating EC,
implying that it may soon be a universal tool. EC use is already at
99% in the U.K., where the FSA requires companies to perform an
Individual Capital Assessment. Almost all respondents (89%) are
planning to make further improvements to their EC modeling
capabilities.
About the Study
The report details findings from our Web-based survey, conducted
in the summer of 2006, of chief risk officers, chief financial
officers, chief actuaries and other senior executives from more than
200 insurance and reinsurance companies around the world. Eighty
percent of the participants were almost evenly split between North
America and Europe, with another 16% representing the Asia-Pacific
region and 4% from Latin America. The report is available at
www.towersperrin.com/tillinghast.
About Towers Perrin and Tillinghast
Towers Perrin is a global professional services firm that helps
organizations around the world improve their performance through
effective people, risk and financial management. Through its
Tillinghast business, Towers Perrin provides global actuarial and
management consulting to insurance and financial services companies
and advises other organizations on risk financing and self-insurance.
Areas of focus include mergers, acquisitions and restructuring,
financial and regulatory reporting, risk, capital and value
management, products, markets and distribution; and financial modeling
software solutions. The firm's other businesses are HR Services, which
provides human resource consulting and administration services, and
Reinsurance, which provides reinsurance intermediary services.
Together, these businesses have over 8,000 employees and 78 offices in
76 cities in 24 countries. More information about Tillinghast is
available at http://www.towersperrin.com/tillinghast.
