September 1st, 2009

ERM Did Not Fail in 2008, Part II: Expectations and ERM

Posted at 1:00 AM ET

mango_smallDonald Mango, Chief Actuary
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Did Enterprise Risk Management (ERM) work: yes or no? Opponents argue that this supposedly advanced thinking on the management of capital failed to keep balance sheets healthy through the economic crisis. Insurers losing more than 30 percent of their capital cannot be faulted for concluding that ERM did indeed fail. Alternatively, though, supporters could point out that the capital was depleted because it absorbed unexpected loss-arguably a core function of insurer capital. The holistic approach to risk management meant insurers were beaten but not broken.

The difference is one of expectations, and the truth is somewhere in the middle. Those who expected ERM to provide a comprehensive, impenetrable safeguard were disappointed, while carriers seeing their frameworks as having repelled an assault on their balance sheets claim success.

In either case, there remains room for improvement. Insurers withstood a major test of their risk management capabilities, and should find ways to strengthen their ERM frameworks. The conditions for self-examination are ideal; we are looking back on the unimaginable with the benefit of some painfully earned experience. Furthermore, capital remains constrained this year, requiring companies to exercise risk management discipline in their portfolio planning.

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Read Part I: A Year of Significant Loss >>

Originally published in MMC’s Viewpoint magazine >>

Download the latest issue of Viewpoint (PDF) >>

Order Guy Carpenter’s ERM book, Enterprise Risk Analysis >>

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