ERM Programs Lacking in Clarity

Simplifying risk reporting a major challenge for chief risk officers, survey finds.

By Cyril Tuohy

Risks facing U.S. insurance carriers have always been difficult to assess. Now comes word that enterprise risk management, the framework used by chief risk officers to understand those exposures, leaves many a board member confused.

"Board members and business-unit heads have no desire to be risk managers, and too often the ERM data presented is difficult to digest and apply to strategic decision-making," said Doug French, managing principal of Ernst & Young and a leader in the firm's Insurance Advisory Services unit. "The best way for CROs to be effective is to package the information in a way that is easy to understand."

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The findings, contained in the 2008 Insurance Risk Leadership Survey released in late April, leave carriers facing a contradiction. The board of directors is having trouble understanding the value of enterprise risk management programs, yet ratings agencies have started taking into account enterprise risk management programs when assigning ratings.

The findings also mean chief risk officers still have an uphill battle as they fight for the attention of executives above them, and for resources from the parent corporation to help them execute the needed risk management functions. "Executive management is still skeptical, asking how much ERM will cost and what the ultimate payoff will be," according to one CRO roundtable panelist quoted in the report. "It is difficult to make the rubber hit the road and get the necessary buy-in if we aren't even speaking their language."

The survey also revealed that, despite their title, CROs sometimes play a limited role in assessing risk because those roles are already filled by the chief technology officer or other governing committees responsible for evaluating specific risks.

Companies that are best equipped to handle the exposures they face are those that share information and respond swiftly to changes in the marketplace, the survey also found.

"The companies that are best weathering the current credit crisis are those with agile risk management processes and systems, as well as an effective way to share quantitative and qualitative information in order to have meaningful management team discussions," said Chris Karow, partner with Ernst & Young.

The survey was conducted among chief risk officers of the largest U.S. life/health and property/casualty companies.

May 1, 2008

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