Insurance execs need better enterprise risk management

Insurance execs need better enterprise risk management

Insurance industry executives say their companies could be doing a better job of assessing enterprise-wide risk, especially operational risk.

That's one of the findings from a recent Tillinghast-Towers Perrin survey on enterprise risk management, which reveals that while almost all insurance industry executives believe a program to assess, mitigate and transfer enterprise-wide risk can help their companies, they are not satisfied with their current risk management tools, techniques and processes.

"Respondent do not think their companies are doing a good job of prioritizing risks from disparate sources or optimizing business and risk management strategies in light of risk/return requirements," says Jerry Miccolis, the principal of TillinghastTowers Perrin who conducted the survey "Additionally, executives are dissatisfied with their ability to accurately model risk impact on financial results. They do not believe a coherent framework exists to guide risk and capital management activities and clearly feel they need one."

Operational risk was an area in which survey respondents noted particular concerns. "High dissatisfaction levels were expressed with regard to such operational risk sources as people/intellectual capital, distribution channels, technology and catastrophes," Miccolis says.

"Dissatisfaction also was expressed with their ability to measure or stochastically model operational risk for inclusion in capital determination," he adds.

Enterprise risk management, or ERM, focuses on improving capital efficiency, supporting strategic decision-making and building investor confidence.

"ERM can improve capital efficiency by providing an objective basis for allocating resources, reducing expenditures on immaterial risks and exploiting natural hedges," says Miccolis. "It supports strategic decision-making by uncovering areas of high potential adverse impact on the drivers of enterprise value, and identifying and exploiting three areas of risk-based advantage. The process demonstrates proactive risk stewardship."

According to the survey, the top three business issues for respondents was earnings growth, revenue growth and return on capital. Survey participants also noted that ERM would be a valuable tool in helping companies achieve those business objectives.

Survey respondents accorded technology the highest importance among 16 risk sources-a 4.27 weighted average ranking on a five-point scale. Interest rate risk (4.08) was second highest, followed by distribution channels (4.03). Respondents were least concerned about currency capital market and catastrophe risks.

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