Risk management remains at the forefront of insurance companies’ minds, with Enterprise Risk Management(ERM) as a solution to risk management growing in popularity, according to a new research conducted by Barnett Waddingham’s Insurance Actuarial Practice.
The survey revealed that almost 90% of respondents practiced risk management, with half of the insurance companies surveyed developing integrated ERM or equivalent. However, despite the strong buy-in for the concept, less than 5% are totally satisfied with the results of ERM, suggesting there is still some way to achieve the desired outcome.
ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the company’s objectives(risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. ERM is a fundamental tool to assist firms in Solvency II implementation.
The survey, which was designed to ascertain how well firms have integrated their risk functions, showed that 23 of the 44 insurance companies surveyed have an established ERM framework and only two firms are not planning on integrating its risk management function. Other insights gained from the survey relate to resources required for the function, risk management objectives, and the barriers facing firms in the process.
The survey also revealed:
- Despite 39 firms having ERM or a similar operation in place under a different name, only two firms are totally satisfied that their implementation has been successful.
- 48% of respondents said the key objective for a company’s risk management is to enable risk-based decision making.
-The role of the Board is vital in risk management with 66% of respondents stating the entire Board has overall responsibility for the firm’s risks.
-Risk registers are more frequently reviewed than other risk documents, with 57% of respondents reviewing this at least quarterly. An annual review of other risk documents is most common.
-No respondents see the current economic conditions as a barrier to integrating risk management frameworks. Half of respondents said that insufficient resources were the main obstacle.
-Stress testing, sensitivity testing and scenario analysis are the most valuable techniques used to quantify risks and set tolerance levels.
Kim Durniat, partner, Insurance Actuarial Practice comments:
“It is encouraging to see the increased focus on integrating risk management through ERM is being put into practice by over half of the firms surveyed. Solvency II is likely to have been a driving force for firms to establish a risk management framework. Despite the recent delay in its implementation, consultation papers published by EIOPA in March encourage the implementation of guidelines for an effective system of governance and risk management from 1st January 2014. This remains at the forefront of insurers’ minds.
There are still a number of firms who have been unsuccessful in implementing their risk management functions. Inadequate resources and expertise have been identified as a barrier to effective implementation.
ERM is a relatively new concept in business but is developing fast. It will be interesting to see how factors such as time, new regulations, and economic conditions affect its relevance as a business tool.”
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