Those with ERM in place lost considerable capital: Guy Carpenter

Companies using Enterprise Risk Management (ERM) frameworks lost considerable amounts of capital despite the protective measures in which they had invested, according to Nick Frankland, CEO of European operations with Guy Carpenter.
In his report, Capital Management Strategies Forced to Mature, Frankland notes that holistic risk and capital management may be the only means to truly protect balance sheets from both potential financial market and natural catastrophe losses in 2009.
But this raises the issue of ERM, he added. He acknowledged some industry observers felt that ERM let the industry down during the advent of the credit crisis midway through 2008.
But “the apparent failure of risk controls last year was really a shortfall in strategic planning,” he said, and not a product of the ERM model per se.
“The ERM frameworks in place did not necessarily address the full spectrum of risks — from covered physical events to financial markets — that many companies faced,” he writes. “An ERM framework is only as effective as the planning process that underlies it.”
Exposures from unidentified gaps, due to insufficient diligence, contributed to the effects of the financial turmoil, he notes.
“The application of theoretically flawless assumptions to a carefully constructed portfolio of insurance risks using model output reflective of genuine fortune-telling … constitutes only partial risk management,” Frankland writes.
“The asset side of the balance sheet, which fuels underwriting activity, must be wrapped into a broader effort to manage capital and measure the results of its use.”