Progress and Gaps Revealed in Insurance Industry Journey Toward Higher Level of Risk Management

NEW YORK, June 16 /PRNewswire/ -- While the large majority of insurance companies today have enterprise risk management (ERM) policies, they are works in progress rather than fully integrated elements of the corporation, according to a new Ernst & Young LLP report released today, Moving to the next level -- a progress report on insurance risk leadership.

This third bi-annual survey of chief risk officers (CROs) delves into current and future enterprise risk management (ERM) plans of major insurers and captures qualitative insights based on an in-depth discussion of the results at a recent senior executive roundtable.

"Insurers have made significant strides laying the necessary ERM groundwork over the last few years, creating a strong sense of optimism with respect to future plans," said Doug French, Managing Principal and Insurance and Actuarial Advisory Services Leader, Ernst & Young LLP. "However, insurers need to be mindful of not underestimating the work required to reach the ultimate goal of adding value to the business decision-making process. In many ways, the industry is just beginning to recognize the challenges ahead."

The report is divided into three areas critical to improving insurance risk management: 1) risk organization and risk governance; 2) risk measurement, aggregation, reporting and monitoring; and 3) strategic management and decision-making. Highlights of ERM challenges and opportunities include:

    -- ERM goals and objectives - Three objectives currently drive risk
       management in the insurance sector: enhancing shareholder value,
       managing potential tail risk exposure and strategic decision-making.
    -- Diffusion of risk ownership - Many companies indicate the
       responsibility for the ownership, management and monitoring of specific
       risks is unclear and is spread across functions. Diffused risk
       ownership can result in unclear responsibility and accountability for
       risk strategy and appetite and raises questions about the fundamental
       underpinnings of risk governance.
    -- Impediments to integrating risk into the strategic decision-making
       process -. The lack of risk modeling capability in terms of resources,
       sophistication and insufficient data was seen as the most significant
       barrier to achieving ERM today and cited as a continuing challenge in
       the future.  As ERM evolves, the ability to integrate risk into
       strategic planning will separate the industry leaders from the
       laggards.
    -- Limitations of current risk reporting - The issue of emerging risks
       remains a crucial gap in most companies' ERM policies and practices.
       While they are working toward developing formal processes for
       identifying and handling emerging risks, the majority of insurers do
       not have such processes in place today.
    -- Challenges to meaningful risk aggregation - The multiplicity of
       measures used across risk types suggests that linkages between risk
       appetite and tolerances and limits remain weak, preventing insurers
       from controlling aggregate risk exposures.  Yet, CROs expect that in
       addition to managing day-to-day exposures at the corporate level, going
       forward, risk aggregation is likely to play an important role in
       capital management, communication of risk exposures and capital
       reduction required by rating agencies.
    -- Economic capital as a business tool - Most companies are developing or
       have implemented economic capital (EC) and recognize its practical uses
       with respect to communicating exposures, setting tolerances and limits,
       managing tail exposure and making strategic decisions.  CROs expect EC
       will become integral to capital management and risk-adjusted
       performance measurement, and 90% expect that, within three to five
       years, EC will be a key element in performance measurement.

"The first step toward achieving any goal is gaining a true picture of the obstacles that must be faced so a realistic plan of action can be put in place," said French. "As insurers continue on their ERM journey, it is important they take a step back at key points along the path in order to plot an appropriate course of action. With the basic building blocks in place, insurers are now at a critical ERM juncture. Moving to the next level will require a significant commitment, but organizations that make the investment will reap the rewards in the end as risk management will increasingly become a competitive differentiator."

To receive a copy of the report, please contact Deanna Decker at 212 752 8338 or ddecker@psbpr.com or go to www.ey.com/us/actuarial.

About Ernst & Young Insurance and Actuarial Advisory Services

Ernst & Young's North American Insurance and Actuarial Advisory Services (IAAS) practice includes 175 professional staff throughout the United States, Mexico, Bermuda and Canada. IAAS helps clients address risk, reporting, capital management, merger and acquisition due diligence and integration, retirement income and actuarial department transformation issues. The practice also provides insurance risk management and claims advisory services.

About Ernst & Young Financial Services

Ernst & Young's Financial Services practice, comprising nearly 30,000 professionals worldwide, is a leader in providing assurance, tax, transactions and business advisory services to asset management, banking, capital markets and insurance clients. Our multidisciplinary resources are led by more than 2,600 partners located in key financial centers around the world. Ernst & Young is the only public accounting firm with a separate business unit dedicated to the financial services marketplace.

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