A Tillinghast – Towers Perrin (Tillinghast) survey on Enterprise Risk Management (ERM), shows insurers around the world are increasingly adopting ERM, a relatively new approach to the strategic management and exploitation of risk from all sources – operational, strategic and financial.
Forty-nine percent of survey respondents report having some form of ERM already in place today, and another 38 percent are considering adopting it. Additionally, 38 percent of respondents have appointed a Chief Risk Officer (CRO) – almost double the 20 percent found in the first Tillinghast benchmarking survey published in 2000 – perhaps the strongest sign of the increase in the use of ERM.
Nearly 90 percent of respondents say they are adopting ERM because it is a “good business practice,” according to the study, a motivation far more widespread than other well-publicized external influences such as “corporate governance guidelines” (42 percent) or “regulatory pressure” (35 percent). However, the study, which covered all sectors of the global insurance industry, also revealed insurers’ dissatisfaction with available tools, processes and capabilities used to manage risks and sources, especially non-financial risks.
“These results show the industry is making significant progress in implementing ERM but has yet to capitalize on its full potential,” said Jerry Miccolis, Tillinghast – Towers Perrin principal and leader of the firm’s ERM consulting activities. “To fully reap the benefits of ERM, companies should follow the ‘best practice’ of first developing and clearly articulating a company-specific, senior management-supported ERM framework that firmly establishes the company’s objectives, scope and organizational structure for ERM.”
“Based on a comprehensive ERM framework,” Miccolis continued, “companies can then apply a practical, straightforward implementation process that systematically proceeds from comprehensive risk assessment to defining alternative financial and operational strategies, to evaluating those strategies from the standpoint of shareholders and policyholders, and then selecting the strategies that provide the optimal balance of value to both.”
Other findings include:
*ERM Addresses Key Business Challenges: The survey results show a strong endorsement of ERM as a business-building tool, with clear agreement among insurers that it helps address their most pressing business issues today. For most of the leading issues, more than 75 percent of participating executives – and in some cases more than 90 percent – believe ERM will help them contend with the issues: earnings growth (77 percent), return on capital (89 percent), earnings consistency (92 percent), strategic/operational planning (97 percent), pricing adequacy (77 percent), capital management/allocation (92 percent) and asset/liability management (93 percent).
*ERM Helps Drive Top-Line Growth: One of the most important findings of the survey, according to Miccolis, was the large number of respondents who said ERM helps them with revenue growth, 55 percent of those who cited that as a major issue. “For many people in the industry, that finding may seem counter-intuitive. How can ‘managing risk’ help grow revenue? In truth, ERM, as this finding attests, is a true business-building tool. It’s a formal discipline that enables companies to make robust decisions about the strategies – for example, growth strategies – that are most likely to produce the greatest return, given the risk profile of their organization,” said Miccolis. As the survey showed, two groups of companies especially cited the significant impact of ERM as a business-building tool: firms in Canada, where ERM is arguably more advanced, and companies that have more practical experience with ERM (75 percent of all companies that have already implemented ERM say it helps them grow revenues).
*CFOs Are Taking A Central Role In Implementing ERM: While more and more companies are appointing CROs, the survey shows that the Chief Financial Officer (CFO) is taking a lead role in ERM. The CFO is cited – by 33 percent of participating companies – as having “primary responsibility” for overseeing ERM activities. The CRO is a distant second, cited by 19 percent of respondents, followed by the Chief Actuary (16 percent), the risk management committee (10 percent), and the CEO (7 percent). Even when a company has a CRO, in 47 percent of the instances, he or she reports to the CFO. When a company has an ERM committee (a practice reported by 38 percent of respondents), the chair is almost as frequently the CFO (22 percent) as the CRO (25 percent).
*Communication And Organizational Skills Are Critical In An Effective CRO: While the majority of all respondents ranked “technical skills” as the first or second most important competency of a CRO, Canadian companies rate communication and organizational skills as most important.
“We think the Canadians have it right,” asserted Miccolis. “Among the most successful ERM companies we’ve seen, the CRO functions as the ‘ambassador’ of an ERM culture change. We feel that for ERM to realize its full promise, communication and organizational skills are the most important characteristics of an effective CRO.”
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