The current financial crisis has gone by several monikers during its evolution, but it might just as well be called the risk management crisis. Whether the emphasis is placed on subprime financial instruments or the resulting credit freeze, the crisis is attributable in great measure to financial services companies' failure to properly manage their risk exposure.
While that failure of risk management may have begun in the banking industry, insurers are also implicated now. AIG's meltdown may have had to do with transactions unregulated by the insurance industry, but it nevertheless gave the impression to the public that insurers were also dealing carelessly with risk. Moreover, as the crisis advanced, several other major insurers were demonstrably unprepared to deal with the securities market turmoil and thereby lost credibility with investors and consumers.
Demonstrating risk management competence will likely be an important factor in winning back that credibility, according to Eva Dewor, a senior executive in Accenture's insurance practice. "Markets are now ... sensitive about risk management capabilities," she asserts. "Risk management ... is a key component to reestablishing trust in the marketplace."
As such, senior management will be disposed to invest in developing risk management capabilities, and initiatives will be strongly linked to CIOs' agendas, Dewor believes. "The business will be in the driver's seat to define which capabilities need to be enhanced, but ... IT will have huge importance in the setup of the risk management area since it is the department in charge of data quality," she says.
A great deal of investment is likely to be directed at overhauling risk management methodologies and governance, according to Dilip Krishna, partner and head of Teradata's (Miamisburg, Ohio) enterprise risk management practice. Insurers have traditionally been very strong in evaluating the risks associated with underwriting a particular risk, but they are less adept at assessing enterprise risks, according to Krishna.
As insurers assess the shortcomings of their enterprise risk capabilities in the wake of the financial crisis, they will largely be preoccupied with "fixing what's broken," according to Doug French, managing principal and global director of insurance and actuarial advisory services, Ernst & Young (New York). "For example, if not knowing what your asset/liability position was on a weekly basis caused the breakage, you need a new process," he says.
Building ERM Discipline
Over the past few years, the insurance industry has worked on building the organizational policy, governance and measurements to provide a foundation for enterprise risk management (ERM), but it has a great deal of work to do on its governance and methodologies, French opines. "Insurers need to develop much more intellectual capital around risk management discipline," he asserts.
While the business must drive risk management, CIOs should take an interest as well, suggests Van Beach, a consultant with Towers Perrin (Stamford, Conn.). While ERM consists largely of getting the right information to senior management, in the life insurance industry IT can make an important contribution at the actuarial department level, Beach advises. "CIOs don't want to know what is going on in actuarial departments, but someone needs to rein this group in," he says.
Beach argues that IT needs to help the actuaries by creating more-efficient processes, using grids more effectively, providing better tools, breaking down silos, and helping with automation and controls. Actuaries spend about 95 percent of their time generating results from risk modeling but only 5 percent actually analyzing and assessing those results, according to Beach. IT can help, he says, by "freeing the actuaries from low-value-added tasks and enabling them to analyze, interpret and manage risks."
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