PricewaterhouseCoopers Survey Raises Questions on Enterprise Risk Management

July 2, 2008

A new survey, released by PricewaterhouseCoopers (PWC) London office, notes that although significant progress has been made by the insurance industry in adopting enterprise risk management (ERM) techniques, questions still remain concerning their effectiveness.

PWC noted the “background of an ever tougher risk environment and growing demands from investors, regulators and rating agencies. However, the accounting firm also indicated that “many insurers and other financial services organizations are asking questions about the effectiveness of ERM and its ability to deliver a return on investment or meet the expectations of stakeholders.”

There has been “good progress” in terms of “developing and implementing ERM capabilities amongst insurers,” said PWC. “More than 90 percent of survey respondents have ERM programs in place and see it as an opportunity to improve decision-making and increase shareholder value. ERM is also clearly a boardroom priority across the industry, (66 percent strongly agree and 23 percent slightly agree), with some 40 percent of respondents stating that their firm has a board-level ERM committee.

“The role of the chief risk officer (CRO) is also gaining in stature with around 60 percent of firms saying that their CRO communicates directly with the board on at least some risk management issues.”

However, the report continued, “despite progress at the top, the study found that ERM is, in many cases, neither relevant to nor clearly understood by business teams. It is not fully embedded into strategic decisions and its integration into day-to-day decision making and frontline risk taking within many insurance companies remains limited, potentially undermining its ability to deal with a more complex risk environment and more exacting stakeholder expectations. “Fewer than half of survey participants are confident that ERM has been embedded into their strategic planning, resource allocation and performance management functions.”

Clare Thompson, head of PWC’s risk advisory services for the financial services sector, explained: “Senior management expectations of ERM have soared as they increasingly look for ERM to help them strike the right balance between risk and reward amid mounting competition, a softening of non-life rates and the credit turmoil which has highlighted systematic risk management failures in many financial services businesses. At the same time, the evolving risk environment and more exacting analyst, investor, regulator and rating agency expectations are raising the bar for ERM, increasing the pressure on insurers to put risk at the heart of their strategy and operations.

“The findings of our latest survey indicate that while many insurers have made valuable progress in developing effective ERM capabilities, unless they make ERM relevant to and integral across their businesses as a whole it will not meet expectations and achieve anticipated objectives.”

PWC listed the main areas of concerns about ERM as follows:
Risk limits often do not reflect enterprise-wide risk appetite.
Procedures for monitoring and control are often still orientated around separate risk/business silos, making a portfolio view of risk difficult to sustain. While most insurers are at least ‘fairly confident’ (and 44 percent are ‘very confident’) that they have clearly defined their risk appetite, critically, the alignment of risk appetite and key business decisions is often limited.
ERM effectiveness is often hindered by poor risk information and analysis. Many respondents also recognize that their risk and data systems are still patchy. According to the survey, fewer than 40 percent of respondents believe their firm’s risk data and systems are ‘good’ or ‘excellent’, only a marginal improvement from 2004. Communication and escalation of risk information were also highlighted as areas of weakness. Many participants are still finding it difficult to monitor and manage emerging risks, and fewer respondents appear to be using their ERM knowledge to identify and capitalize on unfolding opportunities, rather than simply mitigating their exposures.
Attracting and retaining talent is critical. Good people are critical to developing the status and effectiveness of ERM. It is telling that few respondents felt able to answer the question about the industry’s ability to attract, hire and train competent risk managers.

Thompson added: “Greater attention to recruitment and career development will be critical in ensuring that organizations have the people they need to develop and deliver value from ERM. In turn, more effective training could help to improve awareness of risk and enhance understanding of how ERM worked and can contribute to the business.”

PWC said its survey “demonstrates a strong commitment for ERM but if insurers want to take ERM to the next level, they need to develop a much stronger firm-wide understanding of its mission and objectives, a clearer allocation of appropriate roles and responsibilities and the ability to leverage risk management capabilities that already exist within the company.”

“It is likely 2008 will provide an immediate challenge to the efficacy and organizational relevance of ERM as insurers face market and economic stress,” Thompson concluded. “However, within this challenging environment, effective ERM could help companies to sustain investor confidence, identify commercial opportunities and allocate scarce capital where it can earn its best risk adjusted return.”

For a copy of Does ERM Matter? Enterprise Risk Management in the Insurance Industry 2008, contact Alpa Patel on +44 (0)20 7212 5207

Source: PricewaterhouseCoopers LLP – www.pwc.com/uk

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