Report Identifies Major Risks for P/C Insurers

September 19, 2006

Casualty Actuarial Society, ERM Institute International, Ltd (ERM-II), and the CAS/SOA Risk Management Section have released the results of a major research project titled “Enterprise Risk Management for Property-Casualty Insurance Companies.

The research report identifies major risks associated with business operations for P/C insurance companies and puts forth a conceptual ERM framework for these companies.

Major findings of the report:

1. Risks are defined within their contexts as “risk dynamics,” with their specific players, drivers, forces and impacts. Enterprise risk management is defined as the discipline of studying the risk dynamics of the enterprise, the interactions of internal/external players and forces, and how players’ actions (including the risk management practices) influence the behaviors of the risk dynamics, with the ultimate goal of improving the performance and resiliency of the system.

2. Property/casualty insurance companies are characterized by the risk dynamics associated with the risk selection (underwriting and pricing) process, which cautions against naïve application of financial portfolio theory. The research demonstrates that, for commercial lines, large national insurers tend to show poorer underwriting results than small regional companies. This calls for methodological improvement in the rating agency reviews of large versus small companies.

3. In the past the industry has focused much time and energy on the prediction of the loss component of the loss ratio. The problem with so much emphasis on this component is that it is a trailing indicator. Only after several years can one effectively draw conclusions on the longer tail lines. Going forward, we must focus much more attention on the denominator in the loss ratio calculation, namely rate levels on exposure. Rate levels, which are generally known at inception date of the policy, can be considered leading indicators that are more timely and effective in predicting loss ratios, and therefore pricing cycles.

“Our ERM framework starts with an analysis of the very business model, which helped to identify the dominant risk drivers and issues,” said Dr. Shaun Wang, executive director of ERM Institute International, and lead researcher for the project. “Then we looked at the whole decision-making process, which helped make true integration an actionable term for insurance executives, underwriters, actuaries, rating agencies and regulators.”

“Although the context of the research study was property-casualty insurers, the paper proposes an ERM conceptual framework that is applicable to other industries,” said Fred Tavan, chairperson of the Research Team for the jointly sponsored Risk Management Section of the Society of Actuaries and Casualty Actuarial Society.

The report is available through the Research section of the CAS Web Site at

Source: Casualty Actuarial Society

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