Regulation, capital standards top concerns for North American insurers: EY study

Regulation and capital standards were seen as the biggest risk challenges facing the insurance industry, according to an Ernst & Young LLP (EY) study of senior risk executives from 20 North American insurance companies. 

A focus on value creation and regulatory oversight, EY’s fifth annual survey of North American chief risk officers (CROs) and other senior risk executives, released on Wednesday, said that 40% of CROs saw regulation and capital standards as the biggest risk challenges facing the insurance industry today.

The next biggest area of concern (14% of respondents) involved cybersecurity.

“The most significant concerns include looming capital standards as well as a grudging acceptance that more regulation is on the way,” EY said in a press release. “However, CROs reported that risk management has become embedded within their organizations, making them better prepared to deal with these risks.”

CROs reported that the “current lack of common accounting standards and capital measures makes it difficult for firms to compare performance and solvency across companies.” And as the United States Federal Reserve and the International Association of Insurance Supervisors (IAIS) examine options for a common standard, insurers of all sizes are readying themselves to deal with the new mandates, the release said.

“While the capital standards currently being formulated may initially only impact internationally active or systematically important insurers, the survey found that there is an acceptance that the standards will trickle down to all insurers,” said Bill Spinard, executive director of the Insurance Risk Management practice of Ernst & Young LLP, in the release. “The CROs we interviewed realize that multiple sets of minimum capital standards are unworkable, and that the [U.S. Federal Reserve] and IAIS will ultimately adopt converged standards.”

The survey also found that:

* Interest rates and the economy are still a major risk challenge for the CROs, with 13% citing it as the biggest risk challenge facing the industry;

* Most companies (74%) have some form of a “three lines of defence risk organizational structure,” but there are still many “gray areas” that need to be worked out;

* Just over half (53%) of the companies have a formal model of risk governance/validation practice in place;

* Most companies (74%) believe that Own Risk Solvency Reports have value beyond satisfying regulatory requirements, such as identifying possible gaps in the risk management practices; and

* CROs are spending more of their time and resources integrating risk management practices into the business, with nearly one-third citing this as their biggest accomplishment in 2014.

“Since the financial crisis, risk management and the role of the CRO have expanded significantly,” Spinard added in the release. “Many internal challenges remain, such as talent and recruitment, and many external challenges are on the horizon, such as capital standards and more regulation. But the fact that risk is so deeply embedded within the organizational dialogue at most insurers is reassuring. Most CROs feel they can meet the challenges that will come their way.”