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23rd May 2012

UK insurers need a more effective risk culture says survey

Despite significant investment in overhauling enterprise-wide risk management practices since the crisis of 2008, senior insurance industry executives warn that challenges still remain in realising a fully effective ‘risk culture’ at insurance firms. Worryingly, almost two-thirds (63%) of executives report that Chief Risk Officers (cros) or Heads of Risk are still not on insurance companies’ Boards of Directors, according to a survey by global consulting firm Protiviti.
The findings from the survey suggest a Board-endorsed risk culture has failed to take root in UK insurance companies. While insurers are continuing to invest in risk technologies to help meet compliance demands, a general ‘tick-box’ attitude to risk means UK insurers are missing out on the enterprise-wide opportunities presented by regulation such as Solvency II.
According to the research, just 56% of senior insurance executives report that their Board provides executive management sponsorship and ownership of their firm’s risk management procedures. Only one in five (22%) executives surveyed say their firms are using risk-based return on capital measures in business planning, while under half (48%) report that the Board always sets risk appetites. Just 19% of survey respondents believe the frequency and quality of Board discussion around risk management is “strong”, with over half (55%) describing it as “fairly strong”.
Peter Richardson, managing director at Protiviti UK, said “The attitude towards the risk function seems to be that it is a regulatory requirement, rather than a source of added value to the company. It’s worrying that fewer than one in four of those we surveyed saw value-add in the risk function. The need to embed risk culture in insurance organisations may be widely recognised, but Protiviti’s research shows there is a long way to go before Boards regard it as more than simply tick-box compliance, though one positive note is that the majority (67%) of respondents report that their firm’s risk culture is being addressed as part of their firm’s training programme.”
While 77% of senior insurance executives report that their Board now “owns” their firm’s Solvency II programme overall, one in four (27%) report that their Board has only “sometimes” been involved in actually running their firm’s ORSA process. Just one in ten say their Boards are using the output from their internal capital models in decision-making–another fundamental principle of the Solvency II regime.
Cros in particular report on-going investment in risk management technologies that are set to continue to meet industry best practice as well as regulatory demands. Half (50%) of the cros said that the level of their firm’s automated risk processes are set to increase as they look to technology to improve their practices and reduce cost. Almost two-thirds (63%) report that the costs of dealing with compliance have become “extreme”.
Richardson continued “While most Boards set risk appetite, take ownership of Solvency II, sponsor risk management and measure risk–in other words, they tick all the right boxes–the survey finds that the risk function does not play a significant role in formulating strategy or business planning. It’s disappointing to see that only 15% of those surveyed saw this happening in their organisations. The question to ask is whether during this next wave of risk management, CROs will be sitting on the Board as a matter of course and implementing strategic risk management or just applying risk management processes?”