Towers Watson's eighth global ERM survey has revealed startling progress in attitudes towards risk management and in the frameworks that insurers have implemented. But as Mike Wilkinson explains, there is still work to do
Every two years Towers Watson conducts a survey of enterprise risk management (ERM) practices in insurers. It's probably the largest survey of its kind, involving around 400 executives from all types of insurers – large to small firms in the life, health, property & casualty and reinsurance sectors – and from all over the world.
Because it's done regularly, the survey allows us to gauge how insurers are progressing with implementing ERM – and what progress there has been!
Two years ago, insurers thought ERM would add value and expected it to improve business performance. The tense of verbs is now different: it's really beginning to happen across the whole industry, and ERM has received a firm stamp of approval.
As an illustration, we asked how the risk management function is perceived by the board and the executive team. Three-quarters said risk is a strategic partner and more than half of those said risk added value to both the risk and return aspects of decision making.
Just 18% saw the risk team in its more traditional role as providing risk assurance, and 8% regarded it as a compliance requirement. Almost all larger firms saw risk as a strategic partner.
Regulatory pressure to improve risk management is still a big driver for development, but two-thirds said they are now working on ERM because it's good for business. We all know how important the "tone from the top" is when attempting to make changes, so it was reassuring that half of firms said that a key motivator for improvement was the desire of senior management who see ERM as good business practice.
Attitudes towards ERM are of crucial importance, but the proof of how well firms are advancing is revealed in the frameworks they have in place. Not only do 84% of insurers globally have a documented risk appetite statement and risk limits for day to day risk taking, but 70% also expect to be doing substantial work to ensure consistency between them.
Comparing this to previous years' results, we can see a constant progression in development of risk management frameworks. But there is still some way to go until insurers attain their vision of what they want ERM to be and their ambition is also moving onwards: 78% of insurers said their ultimate vision for ERM capabilities has increased over the last two years.
Among the highest priorities are risk performance metrics and reporting systems. The adage of "what gets measured gets managed" is entirely appropriate here, yet two-in-five are not even halfway finished with building their risk reporting systems.
The construction of metrics is a multi-layered affair: firms have to decide what they want to measure, define how to measure it and gather the appropriate data. It almost goes with saying that the metrics that they choose must be meaningful and relevant, and should be accepted by the business as being useful before the real hard work begins.
Insurers said one of the most important metrics is economic capital, but our survey showed that its use hasn't grown significantly in the past two years.
Perhaps that is not that surprising that implementing economic capital is taking time. Capital models are complex and making them robust is difficult. A long-term, staged programme of development is necessary to obtain the full benefits and an element of continuous improvement is required. Many respondents said that they needed to raise their game on the methodologies for individual risks, the control of model data and calculations, and on model validation.
However, there are evident benefits from going through the pain, as it allows firms to better control their use of capital and improve risk-adjusted returns.
It is in such metrics that the real value of ERM lies: accessing insights that simply can't be obtained elsewhere, and crossing silos to look at risk in the round and providing leading indicators for the business.
The vision of an ideal ERM framework will, without doubt, continue to evolve. But the foundations have been laid and the gap between what insurers want and what insurers get is narrowing.
The challenge for many insurers now is to build on these foundations, bringing together the whole risk appetite framework with the metrics and reporting to continue delivering improved ERM performance to the business.
The full survey report can be found here.
