Using ERM is increasingly important for determining insurers’ credit quality

Enterprise risk management (ERM) will be increasingly critical to assessing the credit quality of North American insurance companies looking forward into 2009, according to a Standard & Poor’s report.
“The insurers that can best identify, aggregate and control their liquidity, credit and market risks during this economic downturn will be the most able to manage their capital needs efficiently and incur the least erosion to their creditworthiness,” S&P’s notes in its article, ‘North American Insurers’ Challenges for 2009.’
The article notes that deteriorating economies — complete with waves of layoffs and dislocations in the credit and equity markets — will present a difficult challenge for insurers in 2009.
The ratings agency has given a number of insurance sectors a “negative” outlook, meaning that it expects more company rating downgrades than upgrades over the next 18 months.
 “Insurers have always needed to be mindful of their capital-management strategies, the pricing of their products, and risks in the equity and credit markets that can affect their business profiles, portfolios, profits and ultimately ratings,” S&P’s notes in a release announcing the availability of the report. “But this is even truer in a recession, when missteps that might have only minor repercussions in sunnier times could now have harsher consequences.”
Nevertheless, the ratings agency notes, the industry has remained strong in the area of capital adequacy and has demonstrated “a better understanding of enterprise-wide risk.”