enterprise risk management (ERM) as a key management issue, many
have yet to implement crucial ERM elements reveals a study by
professional services firm Towers Perrin. Their conclusion was
drawn from a survey of 38 chief financial officers (CFO) of large
and midsize life insurers, 13 percent of which were
multinationals.
Towers Perrin found areas where insurers lag most include
quantifying economic capital (EC), the capital required based on an
insurer’s view of risk.
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A majority (68 percent) do not have this capability. In addition
most CFOs lack tools to measure value creation from ERM (83
percent), to provide a clear and defined vision of risk tolerances,
risk appetite and overall risk profile (71 percent) and to identify
and prepare for emerging risks (69 percent). However, Towers Perrin
found that of insurers that do not have these capabilities most
plan to implement them over the next one to three years.
“We are just beginning to see many companies getting serious about
ERM and moving from just talking about it to implementing robust
methods that address myriad risks,” said Prakash Shimpi, a managing
principal of Towers Perrin with global responsibility for the
company’s ERM practice. “It is abundantly clear that ERM will need
to be higher on the CFO’s to-do-list if in fact companies wish to
maintain healthy levels of financial performance.”
Towers Perrin emphasised the role of rating agencies in ERM
strategies. “Rating agencies have played a key role in advancing
ERM and raising the bar among life insurers, along with the peer
pressure instilled by companies exhibiting best practices,”
explained Hubert Mueller, Towers Perrin principal and ERM sales
leader in North America.
Of note, he stressed: “What were considered strong ERM capabilities
one or two years ago may not be as strong in the current market and
may be barely adequate in the future.”
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By GlobalDataIndicative of rating agencies’ role, nearly 70 percent of CFOs said
they have established or are improving ERM and EC frameworks due to
rating agency comments. In addition 96 percent have discussed their
ERM framework with rating agency Standard & Poor’s or other
rating agencies (88 percent).
Another key finding was shortcomings in insurers’ definition of
risk. “The survey responses indicate that the definition of risk
used in operational risk management is generally not consistent
with the definition used in other areas of risk management, where
high risk is characterised by low probability, or low frequency,
and high impact,” said Ali Samad-Khan, head of operational risk
management consulting for Towers Perrin’s ERM practice.
He added that it is very difficult to implement an ERM strategy
based on an inappropriate conception of risk. “Firms that intend to
implement high-quality operational risk management programmes
should ensure that their framework is built on a solid foundation,”
advised Samad-Khan.
“Specifically, they should ensure that the definition of risk and
the methods used to assess and measure risk are in line with the
evolving standard for industry best practices,” he
concluded.
