OREANDA-NEWS. July 22, 2008. Against the background of an ever tougher risk environment and growing demands from investors, regulators and rating agencies, PricewaterhouseCoopers says that many insurers and other financial services organisations are asking questions about the effectiveness of ERM and its ability to deliver a return on investment or meet the expectations of stakeholders, reported the press-centre of PricewaterhouseCoopers

Good progress has been made in terms of developing and implementing ERM capabilities amongst insurers. More than 90% of survey respondents have ERM programmes in place and see it as an opportunity to improve decision-making and increase shareholder value.

ERM is also clearly a boardroom priority across the industry, (66% strongly agree and 23% slightly agree), with some 40% of respondents stating that their firm has a board-level ERM committee. The role of the chief risk officer (CRO) is also gaining in stature with around 60% of firms saying that their CRO communicates directly with the board on at least some risk management issues.

And yet, despite progress at the top, the study found that ERM is, in many cases, neither relevant to nor clearly understood by business teams. It is not fully embedded into strategic decisions and its integration into day-to-day decision making and frontline risk taking within many insurance companies remains limited, potentially undermining its ability to deal with a more complex risk environment and more exacting stakeholder expectations. Fewer than half of survey participants are confident that ERM has been embedded into their strategic planning, resource allocation and performance management functions.

Sergey Kostrikov, Partner, PricewaterhouseCoopers, said:

“Senior management expectations of ERM have soared as they increasingly look for ERM to help them strike the right balance between risk and reward amid mounting competition, a softening of non-life rates and the credit turmoil which has highlighted systematic risk management failures in many financial services businesses. At the same time, the evolving risk environment and more exacting analyst, investor, regulator and rating agency expectations are raising the bar for ERM, increasing the pressure on insurers to put risk at the heart of their strategy and operations.

“The findings of our latest survey indicate that while many insurers have made valuable progress in developing effective ERM capabilities, unless they make ERM relevant to and integral across their businesses as a whole it will not meet expectations and achieve anticipated objectives.”

Risk limits often do not reflect enterprise-wide risk appetite

Procedures for monitoring and control are often still orientated around separate risk/business silos, making a portfolio view of risk difficult to sustain. While most insurers are at least ‘fairly confident’ (and 44% are ‘very confident’) that they have clearly defined their risk appetite, critically, the alignment of risk appetite and key business decisions is often limited.

ERM effectiveness is often hindered by poor risk information and analysis

Many respondents also recognise that their risk and data systems are still patchy. According to the survey, fewer than 40% of respondents believe their firm’s risk data and systems are ‘good’ or ‘excellent’, only a marginal improvement from 2004. Communication and escalation of risk information were also highlighted as areas of weakness. Many participants are still finding it difficult to monitor and manage emerging risks, and fewer respondents appear to be using their ERM knowledge to identify and capitalise on unfolding opportunities, rather than simply mitigating their exposures.

Attracting and retaining talent is critical

Good people are critical to developing the status and effectiveness of ERM. It is telling that few respondents felt able to answer the question about the industry’s ability to attract, hire and train competent risk managers.

Sergey Kostrikov, Partner, PricewaterhouseCoopers, said:

“Greater attention to recruitment and career development will be critical in ensuring that organisations have the people they need to develop and deliver value from ERM. In turn, more effective training could help to improve awareness of risk and enhance understanding of how ERM worked and can contribute to the business.”

The PricewaterhouseCoopers global survey demonstrates a strong commitment for ERM but if insurers want to take ERM to the next level, they need to develop a much stronger firm-wide understanding of its mission and objectives, a clearer allocation of appropriate roles and responsibilities and the ability to leverage risk management capabilities that already exist within the company.

Sergey Kostrikov, Partner, PricewaterhouseCoopers, concluded:

“Developing ERM (enterprise risk management) is as relevant for Russian insurers as it is for Western ones. The insurance market’s rapid growth, particularly in car insurance and mortgages, and the consequent rapid growth of Russian insurance portfolios can set back the organisation of adequate risk management systems — not only for underwriting risks, but for operational ones as well.

Consequently, to give one example, corporate systems aimed at combating one of the key operational risks — insurance fraud — have a number of significant weaknesses: use of outdated systems and technology, inadequate attentiveness on the part of employees and partners, incentive systems marked by inconsistencies that hamper risk identification, etc. Only a few Russian companies exploit ERM opportunities: according to our data, only three of the 10 leading Russian insurers implement some kind of integrated ERM elements.

It is likely 2008 will provide an immediate challenge to the efficacy and organisational relevance of ERM as insurers face market and economic stress. However, within this challenging environment, effective ERM could help companies to sustain investor confidence, identify commercial opportunities and allocate scarce capital where it can earn its best risk adjusted return.”