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Chief risk officers are rather optimistic about the future role of enterprise risk management (ERM) in the insurance industry. However, the industry won't make the transition to the next phase of ERM without overcoming some significant challenges.
This is one of the assessments discussed at the recent roundtable of senior insurance executives hosted by the Insurance Advisory Services (IAS) practice of Ernst & Young LLP. Those in attendance discussed preliminary findings from the 2008 Insurance Risk Leadership Survey.
"Insurance CROs recognize the next era of enterprise risk management is upon them and are making basic progress in policies, measurement and reporting," said Doug French, Managing Principal and FSO Insurance Advisory Services Leader with Ernst & Young. "However, there are significant gaps that must be filled in order to achieve the end goal of ERM that adds meaningful value to the organization."
Highlights from the survey and discussion include the following: - CROs are confident about the future role of ERM in strategic decision-making, but are they ready to make it happen?
Currently, the majority of companies rely on informal processes for evaluating the risk versus reward decision today. However, 60 percent expect to have formal structured processes for making these assessments within three years. The group supported this goal but thought the timeframe might be too aggressive. Participants in the roundtable were also surprised by the economic capital (EC) timeline outlined by survey participants. Only 28 percent of insurers are using EC as a key performance measure, but 90 percent of CROs expect it to be either a key or main performance measure for their companies within three to five years.
When asked to rank the value of risk aggregation in strategic decision-making today and in the future, survey respondents expected its importance to nearly double. This raised additional concerns among the roundtable group over managing expectations.
While survey respondents expressed optimism about the future, they recognized the impediments to integrating risk into the decision-making process. In fact, when asked to rank potential challenges today and in the future, they cited a number of areas in which they expect more difficulty down the road, including lack of data, modeling capabilities with regard to systems, lack of business unit buy-in, and risk measures failing to capture business dynamics. - CROs are established, but roles and responsibilities are in flux.
Only 25 percent of insurers had a full-time CRO just five years ago (according to the 2003 Ernst & Young survey), but the potential of this recent c-suite addition has yet to be fully realized, and many aspects of the role are still undetermined.
Less than half of survey respondents said that their company's CRO or ERM Committee currently has full authority to influence key activities, including product design and pricing, investment strategy decisions, financial planning, or strategic planning.
Roundtable participants were surprised to learn how limited the current CRO risk monitoring responsibilities are at most organizations. Only half of CROs surveyed say their role currently includes monitoring equity, interest rate, credit, or operational risk. However, the vast majority expect to take on these responsibilities in the future. - The ability to articulate is crucial to generating board attention and strategic impact.
The survey showed that equity and operational risk receive the most attention from boards on ERM-related issues, and a company's appetite for risk and ERM policy received the least.
Roundtable participants suggested a possible cause for the insufficient focus on these core ERM elements: board members are uncomfortable addressing them because of their complexity. One participant said, "Executive management is still skeptical, asking how much ERM will cost and what the ultimate payoff will be. 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 general consensus among roundtable participants was the need for CROs to simplify risk reporting in order to make the information they are sharing more meaningful to the board. This is equally, if not more, important for the heads of business units as they seek this information and are often disappointed to find it is difficult to integrate into the business decision-making process.
"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," French said. "The best way for CROs to be effective is to package the information in a way that is easy to understand. This will lead to informed questioning and give the CRO the opportunity to provide critical risk insight to guide the company in the right direction."
French added, "Of course, the value of this insight will be directly dependent on the ability to measure risk on a timely basis, which remains a challenge."
The 2008 Ernst & Young Insurance Risk Leadership Survey was conducted among CROs from the top 50 U.S. life-health and property-casualty organizations. |
