Yet, insurers also recognise they have work to do around their risk appetite and risk tolerance statements. More than half (57%) expect to make further changes to both in the next two years.
Even as insurers acknowledge more work is needed to link their risk appetite to business operations, many now have a firm foundation in place to advance it. Most (84%) respondents have a documented risk appetite statement, compared to 74% in 2012 and 59% in 2010. Insurers have also made incremental progress with their risk limits, with over 80% having them in place for governing day-to-day risk taking. However, significant work is still planned, with over half anticipating further development to their risk limits in the next two years.
“According to our research, insurers have made significant progress in the development of their risk appetite, which has laid the foundation for links with business operations,” said Mike Wilkinson, Towers Watson’s EMEA Risk and Solvency II leader. “This is encouraging, as a meaningful risk appetite is critical to really build an ERM framework into a useful tool for the business. Risk appetite metrics with risk limits help bring the framework to life for day-to-day risk taking, which has been given an extra impetus in Europe by Solvency II implementation.”
However, less than half (47%) say they have set up processes for external communication of risk exposure against risk appetite, while more than half (57%) indicate additional work is needed. Seventy percent say substantial work is also needed for the top-down, bottom-up consistency of risk limits and risk appetite.
“Risk appetite is complex, particularly when an insurer has to consider all its different risk types and potentially a range of very different businesses. Companies must understand the impact of risk aggregation and diversification on the overall risk profile of a business,” said Wilkinson. “The risk appetite also needs to adapt to changing market dynamics to create an effective risk/reward decision-making process.”
Another important survey finding centred on the priority insurers place on risk performance metrics and reporting systems. Most (95%) said reporting systems that provide relevant, robust and timely information are highly (57%) or moderately (38%) important for their ERM programme end-state vision, but getting it right has been difficult. Only 49% are more than halfway to their end-state vision for the allowance of risk within business processes, while 39% are less than halfway toward their end-state vision for economic capital calculation.
“Many insurers are comfortable articulating metrics for capital, liquidity and earnings at a very high level, but they almost immediately encounter a steep uphill battle trying to figure out what it means for their business units and what it means to the front line, in terms of setting limits, creating metrics they can monitor frequently, and understanding how to actually achieve those metrics,” said Mark Mennemeyer, senior consultant, Americas Life practice.
Though most (87%) insurers agree economic capital is an important metric, its use hasn’t grown much. Two-thirds (67%) of companies say they currently calculate economic capital compared to 64% in 2012. For insurers who do calculate their economic capital, the survey distinguished trends regarding their primary measurement vehicle. The findings showed that insurers use of a one-year risk assessment period and tail value at risk has grown, while the use of value at risk has reduced.
“It’s not surprising the implementation of economic capital is taking insurers some time to achieve,” said Mennemeyer. “Companies can only start reporting on metrics once they’ve decided what they should be, defined how to measure them and collected the data to do so. These metrics then need to be accepted by the business as relevant and meaningful prior to implementing systems changes.”
To download the full survey please click on the document below
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