By CYRIL TUOHY, managing editor
More than nine out of 10 insurance carriers have implemented an enterprise risk management program, but the commitment to such programs isn't always as deep as it could or should be, according to a recent survey.
Evidence of ERM programs is important as ratings agencies consider such programs a key risk mitigation tool and take them into account when issuing a rating.
"The progress is not surprising," said Paul Horgan, a member of the global insurance leadership team with PricewaterhouseCoopers, which conducted the study, titled "ERM in the Insurance Industry 2008.
"The question is, will they keep doing it?" he said.
Good question. While the survey reveals that ERM programs are widespread among respondents of the survey, in many cases risk management has had difficulty selling the concept to the board, and there are questions about whether companies are implementing ERM programs simply to satisfy the dictates of regulators and the ratings agencies.
That more companies are adopting enterprise risk management, there's no doubt. When respondents were asked if there was an established set of goals for ERM and if business units are involved in defining the risk management initiatives, just 7 percent of respondents said yes in 2004, compared with 31 percent in 2008.
On the question of whether an ERM governance structure was in place and whether it is being managed, just 16 percent said yes in 2004, compared with 44 percent in 2008. When asked if the ERM unit is responsible for setting standards for risk management, 20 percent of respondents said yes in 2004 compared with 37 percent in 2008.
On the topic of whether communication of risk management across the organization is effective, 52 percent said yes in 2004 compared with 73 percent in 2008. And finally, when they were asked if the CRO has primary responsibility for designing and monitoring ERM programs, 31 percent of those taking the survey said yes in 2004, compared with 60 percent in 2008.
Horgan said that in the end every company has to decide to what degree they care to implement ERM and to what degree they think it will help them. The key for companies large and small, or for companies who aggressively pursue ERM, is to integrate ERM into the decision-making processes of managers operating in the mid and lower levels of a company.
The gap between senior management and the board of directors, which have overwhelmingly accepted the principles of ERM, and mid- and junior-level managers who are more concerned with meeting monthly or quarterly benchmarks, is real, according to this latest survey.
As many as 75 percent of the respondents "have business units that do not base their risk tolerances on the risk appetite and tolerance levels set by senior management," wrote Horgan and his co-authors. And, as if to underscore just how wide the divide remains, the No. 1 factor in setting risk limits for personal and commercial lines remains underwriting profitability, not any risk measurement, according to the survey results.
Horgan said insurance companies want to implement ERM programs particularly because having one can make a difference in a bond rating and subsequent borrowing costs, but that sometimes the biggest obstacles to implementing such programs have to do with the internal politics of the firms.
"Companies want to do it, but they need the right level of sponsorship to get it done," he said, adding that that's where the art of persuasion conducted by the chief risk officer comes in.
September 15, 2008
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