The Insurance Advisory Services (IAS) practice of Ernst & Young LLP
today announced highlights from a recent roundtable of senior insurance
executives where preliminary findings from its 2008 Insurance Risk
Leadership Survey were shared.
The survey of Chief Risk Officers (CROs) revealed insurers are
optimistic about the future role of enterprise risk management (ERM).
However, while the ERM building blocks are in place, the industry faces
significant challenges as it prepares to move to the next level.
“Insurance CROs recognize the next era of
enterprise risk management is upon them and are making basic progress in
policies, measurement and reporting,”
explained Doug French, Managing Principal and FSO Insurance Advisory
Services Leader, Ernst & Young LLP. “However,
there are significant gaps that must be filled in order to achieve the
end goal of ERM that adds meaningful value to the organization.”
Building on the initial survey findings, the roundtable included a
facilitated discussion of ERM progress and the challenges and
opportunities for integrating risk into the strategic business decision
making process. Following are key highlights from the survey and
discussion:
Confident About Future Role in Strategic Decision Making…
Ready to Make it Happen?
While the majority of companies rely on informal processes for
evaluating the risk versus reward decision today, 60% expect to have
formal structured processes for making these assessments within three
years. One roundtable participant noted, “This
confirms strategic decision making is the big win out of all this.”
The group supported this goal, but was apprehensive about the timeframe
being too aggressive.
Roundtable members were also surprised by the economic capital (EC)
timeline outlined by survey participants. Less than a third (28%) of
insurers are currently using EC as a key performance measure but 90% of
CROs expect it to be either a key or main performance measure for their
companies within three to five years. One roundtable participant pointed
out that this may be a reflection of the pressure the industry is
experiencing from rating agencies.
Risk aggregation was another area where survey respondents displayed
confidence. When asked to rank the value of risk aggregation in
strategic decision making today and in the future respondents expected
its importance to nearly double. This raised additional concerns among
the group over managing expectations. They suggested the desire to
aggregate exposures seems to be ahead of the methodology that supports
it and without the basic data and modeling in place there will be no way
risk can be aggregated across organizations to support meaningful
strategic decision making.
While survey respondents were optimistic about the future, they
recognized the impediments to integrating risk into the decision making
process. In fact, when asked to rank potential challenges today and in
the future, there were a number of areas where they expect more
difficulty down the road including lack of data, modeling capabilities
with regard to systems, lack of business unit buy-in and risk measures
failing to capture business dynamics.
Roundtable members agreed that significant quantitative challenges
remain, but were surprised to find that “lack
of c-suite buy-in” ranked nearly last on the
list of impediments. They suggested this reflects the emerging dual
demands with data and modeling challenges top-of-mind, but a growing
recognition of the importance of packaging information in a way that
will be more useful to executive management.
“Insurers could benefit from the lessons
learned by the banking industry,” added Chris
Karow, Partner, Ernst & Young LLP. “The
companies that are best weathering the current credit crisis are those
with agile risk management processes and systems, as well as an
effective way to share quantitative and qualitative information in order
to have meaningful management team discussions. At the same time, those
who strictly focused on measurement or decentralized oversight are
finding themselves in the eye of the storm.”
CROs Established… But Roles and
Responsibilities in Flux
While it is hard to believe only one-quarter (25%) of insurers had a
full time CRO just five years ago (according to the 2003 Ernst & Young
survey), the potential of this recent c-suite addition has yet to be
fully realized and many aspects of the role are still unsettled.
Less than half of survey respondents reported the CRO or ERM Committee
currently has explicit authority to influence key activities, including
product design and pricing, investment strategy decisions, financial
planning, or strategic planning.
The group was particularly surprised to learn how limited the current
CRO risk monitoring responsibilities are at most organizations. In fact,
only half of CROs surveyed say their role currently includes monitoring
equity, interest rate, credit, or operational risk. However, the vast
majority expect to take on these responsibilities in the future.
One CRO roundtable member called the results shocking and was met with
nods from other attendees as they agreed risk monitoring should be a
fundamental element of the CRO position. Learning that the ERM
committee, the CFO or even the CEO is currently tasked with monitoring
many of these risks, the group suggested this paradigm is unrealistic.
The group was also taken aback by the overall lack of segregation of
duties and diffused risk ownership uncovered by the survey, and
expressed concern this could lead to limited accountability for many
risks.
Roundtable members were less surprised to find certain specific risks
were being monitored by an alternate source, such as operational IT by
the Chief Technology Officer or credit by the ALM committee. However,
they noted this may be a greater CRO hurdle, as wrestling the
responsibilities away from these owners may be more difficult.
Ability to Articulate Crucial to Generating Board Attention and
Strategic Impact
Asked the amount of time the board spends on a range of ERM related
issues, equity and operational risk received the most attention whereas
the company’s appetite for risk and ERM
policy received the least. The immediate reaction of the roundtable was
captured by one participant who said the focus “looks
upside down to me… they are spending less
time on the things that may come back to haunt them sooner.”
The group raised a compelling factor that may be driving the limited
focus on these core ERM elements, suggesting board members are
uncomfortable addressing them because of their complexity. One
participant said, “Executive management is
still skeptical, asking how much ERM will cost and what the ultimate
pay-off will be. It is difficult to make the rubber hit the road and get
the necessary buy-in if we aren’t even
speaking their language.”
The general roundtable consensus was there is a significant need for
CROs to simplify risk reporting in order to make the information they
are sharing more meaningful to the board. It was noted that this is
equally, if not more important, for the business unit heads as they are
actively seeking this information and are often disappointed to find it
is difficult to integrate into the business decision making process.
“Board members and business unit heads have
no desire to be risk managers and too often the ERM data presented is
difficult to digest and apply to strategic decision making,”
added French. “The best way for CROs to be
effective is to package the information in a way that is easy to
understand. This will lead to informed questioning and give the CRO the
opportunity to provide critical risk insight to guide the company in the
right direction. Of course, the value of this insight will be directly
dependent on the ability to measure risk on a timely basis which remains
a challenge.”
The 2008 Ernst & Young Insurance Risk Leadership Survey was conducted
among Chief Risk Officers from the top 50 U.S. life/health and
property/casualty organizations and offers insight into the current
state and future plans of insurers with respect to enterprise risk
management. A full report of the survey findings and executive
roundtable highlights will be published next month. To receive a copy,
please contact Deanna Decker at 212-752-8338 or ddecker@psbpr.com.
About Ernst & Young IAAS
The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst &
Young includes a professional staff of 150 with more than 90
credentialed actuaries throughout the United States and Canada. IAAS
delivers actionable business advice to its clients in the life/health
and property/casualty insurance industries. It also provides insurance,
risk management and claims advisory services to a range of businesses
and corporations. IAAS employs financial modeling and other quantitative
analysis techniques and technologies to assist clients in making
decisions that will improve performance and achieve competitive
advantage. For more information, please visit www.ey.com/us/actuarial.
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