Downturn Nudges ERM Forward

A push toward greater transparency is accelerating the P&C industry’s enterprise risk management (ERM) activities, but companies are still wary of disclosing too much, according to analysts at Guy Carpenter.

Last year’s financial crisis has prompted insurers and reinsurers to adopt—and share—the risk tolerances used to build their risk management strategies, reveals the findings of a GC Capital Ideas report. But while more companies are disclosing risk measurement methods, levels of risk tolerance, and ERM structural information, “the general quality of disclosure remains unchanged,” the authors state in the report, which updates the industry’s ERM efforts since an earlier survey gauged them in April, 2009.

The march toward disclosure remains slow, even though “both shareholders and (re)insurer boards of directors have increased their calls for more effective corporate governance in the quantification and evaluation of risk,” they remark.

Opening Up about VaR, Stress Testing

Like the earlier study, the updated assessment confirms “somewhat limited” disclosure of companies’ risk tolerances, although all companies had disclosed some degree of risk tolerance at the ERM level and were generally increasing that exposure. However, insurers and resinsurers continue to hesitate when it comes to disclosing levels of capital adequacy.

The new  survey reveals that the most disclosed risk tolerance methods– Value at Risk (VaR) and stress testing– are unchanged. When in comes to disclosing tolerance for different risks—group level exposure, market/asset risk, credit risk and insurance risk–  insurers in Europe, the U.S. and Bermuda are more likely  than those in the Asia-Pacific region to acknowledge increased disclosures.

The disclosure gap has also narrowed between European insurers and reinsurers and those in Bermuda, the authors acknowledge, noting “Bermuda companies are now relatively close to European (re)insurers in their level of structural disclosure. Asia-Pacific and the United States continue to lag behind their European and Bermudian peers.”

Do they, or don’t they?

But they add that low disclosure among some regions doesn’t mean that ERM structures, such as having a Chief Risk Officer, don’t exist, “Rather, it highlights that the firms included in the study do not disclose this structural element if it exists.”

“The combination of regulatory, capital market and legislative influences that we noted in our April briefing continues to exert pressure on management to better recognize, quantify and manage risk,” Iain Boyer, chief administrative officer of Guy Carpenter’s
America’s broking operations, said of the findings.

The reinsurer’s latest ERM study examined information from 12 (re)insurance companies domiciled in Europe, six in the United States, nine in Bermuda and eight in the Asia-Pacific region. 

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