ERM Strategies Enable Insurers’ to Play Stronger Offense as Well as Defense

The adoption of genuine enterprise risk management (ERM) culture, methodology and technology capabilities is improving insurers' ability to pursue offensive strategies, including pricing products more effectively.

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Like other somewhat vague objectives that attempt to create a holistic strategy across the enterprise, the pursuit of enterprise risk management (ERM) at insurance carriers has suffered from ambivalence on the part of senior management -- after all, haven't insurers always been risk-managing enterprises? Shouldn't many ERM-related initiatives merely be technologically souped-up approaches to what insurers already do well?

That point of view received a shock with the fall of AIG and the demonstration that many insurers underestimated the full import of their risk portfolio. As a result, insurers along with other financial services companies have placed renewed emphasis on risk management as a defensive exercise. However, industry leaders are combining ERM culture, methodology and technology to drive strategic offense as well as defense.

Many insurance companies owe their success to an organically grown culture of risk management that has taken root over time, suggests Linda Chase-Jenkins, principal, Towers Perrin, and cohead of the firm's global insurance ERM practice. But while that culture may exhibit excellence in practice, it may nevertheless be poorly understood and isolated in pockets of the larger enterprise, she relates.

"Most companies haven't really articulated what their risk appetite is among themselves or their external shareholders, and whenever anything is implicit rather than explicit, there will be varying opinions," Chase-Jenkins asserts. "There needs to be much more articulation, clarity and common understanding; it should be documented, the board should understand it and shareholders need to see it."

Embedding ERM

Insurers are making an effort to achieve genuine ERM capabilities, according to Towers Perrin's 2008 global insurance industry ERM survey report, "Embedding ERM -- A Tough Nut to Crack." Among the major findings of the report is the assertion that ERM programs are driving significant business changes with regard to risk strategy, asset strategies and product pricing. Insurers, the study found, are steadily moving toward implementing economic capital methodologies to supersede statutory models.

But weaving ERM throughout the business is proving to be a significant challenge for insurers. More insurers are still working on mastering the basics of economic capital than using it in decision making at this point, according to Towers Perrin. Fewer than one-fifth of respondents to the Towers Perrin survey affirmed that they have appropriate capabilities in place for risk control, monitoring and reporting.

Achieving embedded ERM involves the aggregation of multiple types of risk simultaneously, and communicating relevant information that reflects their interdependencies at the point where decisions are made, explains Chase-Jenkins. "Embedding is making the risk information available to the decision makers," she explains. "It's not a separate thing -- 'Oh, let me go check with the risk manager how much capital I will need to sell more of this product.' "

ERM typically is thought of in terms of enabling technology, but insurers should be careful about identifying sound ERM practices with supporting technology, counsels Axel Lehmann, chief risk officer, Zurich Financial Services. "You can manage around a lack of automation," he says. "The important thing is that you have standardization and a common understanding of what needs to be reported."

The quality and consistency of information is important, but one shouldn't use its absence as an excuse for failing to apply good risk management practices across the enterprise, Lehmann adds. "To some extent you have to take a pragmatic approach," he says. "I always tell my people, 'Take the best available and most recent information.' As desirable as it would be to have everything at our fingertips, risk management is not about collecting and gathering information; it's about interpretation of it and making decisions about it."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio