Why Risk Managers Should be Grateful for the Great Recession
By CYRIL TUOHY, managing editor of Risk & Insurance®
For risk managers who have often felt that implementing an enterprise risk management (ERM) approach within their corporations was an exercise in futility, the financial crisis may yet turn out to give them an unintended career boost.
That's because regulators, particularly when it comes to companies deemed "too big to fail," will insist public companies prove they have rigorous implementation and calibration models in place, according to a new report by PricewaterhouseCoopers.
ERM models are designed to understand the risks facing management, shareholders and customers, and they are especially important because some insurers are accountable to the government that bailed them out.
The report, titled "Emerging from the Storm: The Day After Tomorrow for Insurance," looks at the implications of the financial crisis for the global insurance and reinsurance industry.
Authored by PwC's global insurance leadership team, the report cites a thread among regulators and governments that insist on the need for strong ERM programs, even in countries not covered by stringent capital adequacy rules.
Particularly with regard to compensation, a risk-adjusted approach will help create "a more sustainable balance between risk and reward, especially when integrated into the enterprise risk management framework," the authors of the report wrote.
"As companies become more risk aware through advances in ERM, they will be better able to choose what risks to retain and what risks to reinsure," the authors wrote.
Implementing an ERM program that will pass muster with regulators is going to require the services of a highly skilled risk manager. Whoever thought there would come a day when risk managers would be so grateful for the presence of regulators?
"We can't predict what's going to happen, but we can predict that there will be more government participation in the industry," said PwC Senior Partner Bill Chrnelich, co-author of the report, in an interview on Wednesday.
Granted, the good news on the ERM front doesn't do much for risk managers who've been laid off in a U.S. economy that in October for the first time in decades cleared the 10 percent unemployment mark.
But for risk managers who can think of the long term--in other words, the day after tomorrow and the day after that--then there's definitely a silver lining in this Great Recession.
Regulators are expected to be particularly rigorous in the wake of this slowdown, said Chrnelich, because the bailouts have cost taxpayers so much, and because governments have now taken ownership stakes in some insurance companies.
"Watching governments globally with all the borrowing they've been doing, they are going to eventually have to pay all that money back, and the insurance industry is going to be a target," he said.
Chrnelich added that insurers and reinsurers are resigned to the fact that changes--for better or for worse, from the perspective of the industry--are going to come, and it is in the interest of the industry to participate in shaping the changes than to resist change at all costs.
"There is room for compromise," he said, noting that some of the changes were in fact welcome by the industry. "The attitude of the industry is one of wanting to shape the changes that are coming down the pike."
December 10, 2009
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