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More progress among linking risk appetite and business operations needed: Towers Watson


June 23, 2015   by Canadian Underwriter


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Insurers may be making progress on building links between risk appetite and business operations, but the second leg of a Towers Watson survey on enterprise risk management (ERM), released Monday, demonstrates there is a long way to go to tie risk performance metrics into effective reporting systems.

About three-quarters of respondents considered risk appetite and risk tolerance statements to be highly important to their company’s ultimate vision for their ERM program

Of those insurers taking part in Towers Watson’s Eighth Biennial Global Enterprise Risk Management Survey, released in late April, 76% consider risk appetite and risk tolerance statements – foundational elements of enterprise risk management (ERM) – to be highly important to their company’s ultimate vision for their ERM program, notes the global professional services firm.

This was second only to risk culture – cited by 78% of respondents – and compares to 61% of those in the 2012 survey, notes the report, which reflects input from 398 senior executives in major insurance companies around the world.

Respondents, more than two-thirds of whom were at the C-suite level, from organizations in North America, Europe, Asia Pacific and multiple regions – representing all lines of business – were asked about approaches to, and current status of, ERM activity within their companies.

Despite recognition that risk appetite and risk tolerance statements are highly important, however, Towers Watson reports that 57% of respondents expect to make further changes to both in the next two years.

Still, there has been some progress to date:

• 84% of those taking part in the survey have a documented risk appetite statement, up from 74% in 2012 and 59% in 2010;

• 82%-88% of respondents have risk limits in place for governing day-to-day risk taking, up from 73%-81% in 2012; and

• 55%-65% report that they expect further development to their risk limits in the next two years.

Development of risk appetite is encouraging, suggests Mike Wilkinson, Towers Watson’s EMEA Risk and Solvency II leader. “A meaningful risk appetite is critical to really build your ERM framework into a useful tool for the business. Risk appetite metrics with risk limits help bring the framework to life for day-to-day risk taking,” Wilkinson notes in the statement.

Related: Global insurers’ satisfaction with ERM performance grew by 10% over the last two years: Towers Watson

In all, 70% of respondents say substantial work is needed for the top-down, bottom-up consistency of risk limits and risk appetite, although there have been some encouraging developments. These include that 78% of respondents report an increase in internal processes for monitoring exposures against risk appetite compared to 68% in 2012, and that 81% of carriers plan to expand in this area.

“Carriers must understand the impact of risk aggregation and diversification on the overall risk profile of a business,” Wilkinson advises. “The risk appetite also needs to adapt to changing market dynamics to create an effective risk/reward decision-making process,” he adds.

Beyond understanding is recognizing the importance of risk performance metrics and reporting systems.

The lion’s share of respondents, 95%, note that reporting systems that provide relevant, robust and timely information are highly (57%) or moderately (38%) important for their ERM program end-state vision.

Although the goal is clear, those surveyed report getting it right has been difficult. “Only 49% are more than halfway to their end-state vision for the allowance of risk within business processes, while 39% are less than halfway toward their end-state vision for economic capital calculation,” Towers Watson notes.

“Companies can start reporting on metrics only once they’ve decided what they should be, defined how to measure them and collected the data to do so,” Mark Mennemeyer, senior consultant, Americas Life practice for Towers Watson, says in the statement. “These metrics then need to be accepted by the business as relevant and meaningful prior to implementing system changes. Insurers must commit to a long-term, staged implementation program to realize the full benefits of economic capital,” Mennemeyer maintains.

Global insurers’ satisfaction level with their ERM performance grew by 10 percentage points over the last two years

In a Q&A on the Towers Watson website, Wilkinson notes that catalysts or business drivers that might prompt insurers to think more strategically about ERM include regulation, losses or issues in parts of the business that require the company to fix something. “But now, as ERM matures, we’re seeing more positive drivers: investment decisions, how to make the best use of capital and financial resources, how to change a portfolio or make M&A decisions. In other words, how to maximize the limited resources a company has at its disposal on a risk-adjusted basis,” he explains.

The latest results stem from Towers Watson’s ERM survey, released in late April. Among other things, the survey found the following:

• global insurers’ satisfaction level with their ERM performance grew by 10 percentage points over the last two years;

• carriers whose ERM function is well-integrated into their business planning reported higher rates of satisfaction (82%) than those without an integrated strategic plan (53%); and

• those with a risk appetite framework linked to specific risk limits expressed higher rates of satisfaction (76%) than their peers with no framework in place (50%).

“Companies that strive for strategic value in their risk management function — as opposed to simply using ERM for regulatory compliance — typically differentiate themselves, in part, by integrating risk management into their strategic decision-making process from the beginning,” Martha Winslow, senior consultant, Americas P&C practice with Towers Watson, said in a statement at the time.

Wilkinson notes in the Q&A that a key point is that risk does not exist in isolation. “Risk only exists as part of the business. So if your risk manager or CRO doesn’t have a clear understanding of company objectives, and the kind of risk/return balance needed to achieve those goals, he or she will only be doing half the job,” he says.

“A lot of insurers are drowning in data, drowning in metrics. One of the beneficial roles of the risk function is to pull a lot of that together, to help the business look at risk drivers, both qualitative and quantitative. Some of it will come from the capital models, but some of it will come from the business’s leading indicators,” Wilkinson says.

“More and more, management is looking at how they want to run the business not just on a capital basis, but on an earning
s and a profit-and-loss basis. That’s an area that life insurers in particular could focus on more,” he adds.


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