U.S. insurers may not be ready for risk management, risk solvency legislation

There appears to be a gap between the perception that polled insurers in the United States have about their readiness for the Risk Management and Own Risk Solvency Assessment Model Act and how complete their enterprise risk management (ERM) frameworks are, notes a new survey from PwC.

The U.S. insurance industry is making strides toward RMORSA, but is still not there, suggests PwC U.S.’s 2012 U.S. Insurance ERM & ORSA Readiness Survey, which involves 65 respondents from the U.S. property and casualty, life and health insurance sectors.

While 82% of respondents believe their existing ERM processes are largely adequate for the planned requirements – insurers must manage a comprehensive ERM framework that is embedded within company operations by January 2015 – 38% of company boards are not engaged or are only passively engaged in risk management.

In addition, PwC reports that 35% of companies indicated they do not have a risk appetite linked to business strategy and financial goals, which is crucial to a comprehensive and effective ERM program.

“Setting the risk strategy, implementing and validating a capital model and developing effective risk reporting capabilities could take a couple of years,” Paul Delbridge, leader of PwC’s risk and capital management services practice, says in a statement from PwC. “Our survey shows that many organizations may be underestimating the amount of work it will take to meet the RMORSA requirements,” Delbridge adds.

Other key survey findings related to the four main parts of an ERM program that directly influence RMORSA preparation include the following:

• risk strategy – 25% of companies reported risk appetite metrics are not part of the business planning process, while 57% include some;
• risk governance – more than 30% of companies do not have a dedicated chief risk officer (who will be largely responsible for compliance with RMORSA requirements), with three-quarters of these insurers reporting other positions cover the role, often on a part-time basis;
• risk management – 22% of companies reported not having a formal process to address risk identification, with most of these insurers adopting an informal one to address risk identification (RMORSA should take place in conjunction with an organization’s business planning process, leading to a high degree of co-ordination between risk, underwriting, strategy, finance and compliance functions); and
• risk quantification – 37% of companies are not using an economic capital measure in addition to the more traditional capital metrics of statutory capital.