Industry needs to leverage enterprise risk management, study says

Property/casualty insurance companies need to do a better job of implementing enterprise risk management, according to a recent study by Ernst and Young LLP. In its recent quarterly outlook addressing key trends and issues facing insurers, Ernst and Young identified the need for a formal risk appetite, the impact of principles-based reserves and the urgency for P/C companies to improve data quality to enhance catastrophe modeling.

“There’s no question that insurance companies are taking enterprise risk management more seriously, particularly as such external pressures as new rating agency criteria increase, but concerns remain around their approach,” the company said in a statement. “Unfortunately, many companies have begun implementing ERM programs without doing the necessary upfront legwork of gaining management consensus around the overall risk appetite of the organization.”

A formal risk appetite, otherwise known as the level of aggregate risk that a company can undertake and manage over an extended period, should yield a level of risk and expected returns that allow the company to meet its mission and financial goals, the company indicated. In its research, E&Y found that companies were getting ahead of themselves by implementing ERM without everyone operating from the same page.

Additionally, the outlook underscored weaknesses in catastrophe modeling techniques. Ernst and Young said the quality of exposure data, especially in commercial lines, is insufficient.

E&Y cautioned that the models should take into account all of the issues surrounding data quality that could affect exposure to other naturally occurring catastrophes, such as earthquakes.

“Smart companies will recognize the current lull offers an opportunity to implement necessary changes addressing the way they collect, store and use data,” said Tom Stone, manager for Ernst and Young’s Insurance and Actuarial Advisory Services. “Those who invest today will realize significant benefits in the future, as it is only a matter of time before the winds blow again.”

For more information on E&Y’s outlook, visit www. ey.com/perspectives.

Topics New Markets Risk Management