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20th March 2013

Survey indicates state of ERM development amongst insurers globally

Global insurance executives across all lines of business believe significant work remains to make risk appetite statements operational in their businesses, according to a new survey of enterprise risk management (ERM) practices. The survey, conducted by Towers Watson asked chief risk officers, chief financial officers and chief actuaries about their approaches to, and current status of, ERM activity within their companies.
Aligning risk taking with risk appetite has become a major challenge for many insurers seeking to embed ERM in the business. While 74% of insurers in the survey now have defined risk appetite statements, 43% have yet to demonstrate consistency with their risk limit structure.
“The ability to articulate risk appetite is a key foundation of risk management, as it defines the types of risk that an insurer seeks and how much risk it is able to take on,” said Ian Farr, global product leader for insurance ERM, Towers Watson. “But without effective implementation and relevant monitoring systems, a risk appetite statement will achieve little beyond a tick in the compliance box.”
Key survey findings on risk appetite are:
-The top two short-term priorities for ERM development globally are risk appetite(40% of participants) and risk monitoring and reporting(39%)
-Over three-quarters of those who have defined their risk appetite recognise the need to develop it further
-Those with risk appetite/tolerance statements in place are almost twice as likely to be satisfied with the contribution of ERM to business performance(60% of participants) as those that do not(34%)
-Insurers are even more likely to be satisfied with ERM’s contribution(70% of participants) after also having established the consistency of their risk limits with their risk appetite
-European insurers referenced risk appetite across a greater number of business processes, such as capital allocation and investment strategy, than insurers from any other region
In spite of the operational challenges ahead, companies have made significant progress since Towers Watson’s 2010 ERM survey. The proportion of respondents with documented risk appetite/tolerance statements in place increased from 59% in 2010 to 74% in 2012. Use of risk appetite has also increased substantially since 2010 in areas such as asset and investment strategy(from 66% to 77%) and strategic planning(from 55% to 71%).
“Insurers have made a lot of progress in developing risk appetite as a relatively high-level concept, but few have yet managed to comprehensively roll it out into business as usual,” said Ian Farr. “This is likely to be a major focus of insurance ERM programmes over the next two years.”
539 senior insurance executives participated in the Seventh Biennial Global ERM Survey, which was conducted during the second half of 2012. Respondents came from risk, finance and actuarial disciplines across all lines of business, including life insurance(41%), property & casualty insurance(25%), multiline insurers(18%) and reinsurance(11%). Geographically, they represented companies in North America(37%), Europe(25%), Asia Pacific(31%), Latin America(5%), and the Middle East and Africa(2%).