Overall, insurers’ satisfaction level with their ERM performance has grown by 10 percentage points over the last two years (63% vs. 53%), highlighted by a 16-percentage-point increase in Asia Pacific (51% vs. 35%). Satisfaction among European companies has increased by seven percentage points to 69% over the same period. Seven out of 10 executives surveyed worldwide expect enhanced risk/return decision making to increase shareholder value.
Insurers’ opinions of their ERM programme hinged on certain factors, such as clear links to business goals. Companies whose ERM function is well integrated into their business planning noted higher rates of satisfaction (82%) than those without an integrated strategic plan (53%). Similarly, those with a risk appetite framework linked to specific risk limits expressed higher rates of satisfaction (76%) than their peers with no framework in place (50%).
“Companies that strive for strategic value in their risk management function — as opposed to simply using ERM for regulatory compliance — typically differentiate themselves, in part, by integrating risk management into their strategic decision-making process from the beginning,” said Mike Wilkinson, Towers Watson’s EMEA Risk and Solvency II leader. “Too often, senior management incorporates risk management later in the process or even after it’s complete, when there’s not much chance of it influencing critical decisions.”
The survey demonstrated that regulatory requirements have still played a key role in how insurers have approached ERM over the last two years. Over three-fifths (61%) of participants said it’s been the leading key driver of change, and this was especially true in Asia Pacific (72%) and Europe (63%), but less so in North America (47%). However, the desire of senior management teams and boards of directors to have an improved ERM programme to support good business practices (59%) was seen as almost as important a catalyst for change.
“Traditionally, the business drivers prompting insurers to think more strategically about ERM have centred on losses or parts of the business requiring the company to fix something,” said Mike Wilkinson,. “But now, as ERM continues to mature, we’re seeing more positive drivers, such as how to maximise the limited resources a company has on a risk-adjusted basis.”
Challenges around regulatory-related issues edged out people challenges as the top obstacle insurers expect to face for ERM implementation over the next year. As in the 2012 survey, European companies said they expected to place the biggest priority on developing their risk culture, followed by risk appetite and tolerance statements and risk monitoring and reporting.
European insurers have generally made bigger strides integrating ERM across most areas of their business compared to their North American and Asia Pacific peers. Insurers in Europe claim to have integrated ERM into their capital adequacy assessment (70%) at a greater rate than their North American (51%) and Asia Pacific (45%) counterparts. This also holds true for progress in the mergers, acquisitions and divestitures (54%) segment of their operations, as well as business planning (59%), where North American (36% and 34%, respectively) and Asia Pacific (26% and 27%, respectively) insurers are lagging behind by comparison.
“Risk doesn’t exist in isolation. It only exists as a part of the business. If your chief risk officer doesn’t have a clear understanding of company objectives and the kind of risk/return balance needed to achieve those goals, you’re not getting the most out of the programme,” said Wilkinson. “But by taking a very strategic approach to risk management, insurers can often sidestep some of the risks they’re exposed to or the risks inherent in the opportunities they want to pursue.”
Towers Watson’s Eighth Biennial Global Enterprise Risk Management Survey can be found here
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