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Tillinghast: ERM Moves Toward the Mainstream

Due to corporate governance, regulations and expectations of financial transparence, senior level management has become more involved in the risk management process.

Due to corporate governance, regulations and expectations of financial transparency, senior level management has become more involved in the risk management process, leading to a greater demand for precise data and data analytics and the elevation of enterprise risk management (ERM) as a corporate priority, according to a survey of 150 insurance executives conducted in summer 2004 by the Tillinghast business of Towers Perrin (Stamford, Conn.). Identifying a major shift in the positioning of the risk management function within insurance companies, the survey found a 20 percent increase in chief risk officers (CROs) having primary responsibility for risk management, a gain from 19 percent in 2002, to a current 39 percent. Additionally, 40 percent of CROs now report directly to the CEO, up from 26 percent in 2002.

"Clearly the management of risk and capital is something every senior executive needs to be familiar with," says Prakash Shimpi, practice leader with global responsibility for enterprise risk management (ERM) for Tillinghast. "They have to set the priorities and tone of the organization, and with new and evolving rules they need to be more familiar with the methods that are employed in data collection and analysis and the assumption or data limitations involved."

An increased impact of risk management strategies on business decisions will lead to the widening use of risk and capital management tools, according to the study. Tools include business approaches, calculations and the technology to manage the amount of data being collected, as well as the complexity of calculations used in risk-based decision making, according to Shimpi. Sixty-seven percent of respondents said that they currently use these tools for asset/investment strategy, while another 19 percent plan to do so in the next 12 to 24 months.

"Most companies that will be doing risk and economic capital analysis to make asset/investment strategy and other decisions want to be able to leverage off the systems they already have today, or upgrade them to heighten usability. The particular economic capital and other data they require will indicate to them the kind of information or data management system that they need," explains Shimpi.

The study highlights ERM ascendancy, with 86 percent of respondents saying that it is a higher priority than it was a year ago, and economic capital (EC) as a rising factor in risk-based decision making, with 53 percent of respondents currently using EC as a critical decision-making tool and 28 percent planning to do so. These factors are further illustrated in the finding that insurers reporting the use of risk management considerations as decision makers in a number of areas, including asset/investment strategy (64 percent), product pricing (61 percent), annual business planning (53 percent), reinsurance purchase (51 percent), strategic planning process (50 percent), product design (47 percent) and product/business mix (40 percent).

All of these areas have the potential to affect IT data systems decisions as well. "If companies already have the information, they need to create the connections between data and results; if not, that is another area that will need to be developed," relates Shimpi. "ERM has come of age. And where once upon a time it may have been debated as a regulatory focus or a value focus, it is now clearly a value focus. This enhanced approach is already making a difference with ways managers are using various technology, approach, and calculating capabilities."

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