Here are our most popular stories on enterprise risk management that have appeared on GC Capital Ideas in 2010.
Turn Insurance Portfolio Modeling and Management into a Strategic Advantage: Companies that optimize the use of economic capital models to holistically manage portfolios may gain a powerful advantage in the marketplace. Improved risk decision-making and capital allocation can translate to profitable growth and an increase in shareholder value. But, it takes a commitment: ongoing integration and evaluation of the models in the operation may create ongoing benefits to results.
Creating Value by Integrating Risk Management with Capital Management and Overall Business Strategy: Enterprise Risk Management (ERM) enables an organization to integrate its risk management strategy with its capital and business strategies, ultimately improving the linkage between operational and financial decision making. ERM consists of four elements: identifying and managing critical risks; quantifying the impact of these risks on capital adequacy and earnings, setting risk appetite and tolerance, and embedding risk management into the strategic decision-making process. Several studies have shown that firms with stable results consistently create more value for stakeholders than those with volatile results.
The Time Profile of Risk: From the Desk of Guy Carpenter’s Chief Actuary: According to the draft European Union Solvency IIc directives, companies will need to provide an “own risk and solvency assessment” (ORSA). The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has prepared an issues paper that provides guidance to assist (re)insurers in implementing the ORSA.
GC Videocast - Enterprise Risk and Risk Capital: A Perspective on the Future (Joan Lamm-Tennant) Guy Carpenter’s Global Chief Economist Joan Lamm-Tennant reviews emerging themes, post financial crisis, around enterprise risk and risk capital.
Corporate Decision Making Using Economic Capital Models: Part I: Introduction, Quantifying Corporate Risk: In the 1980s many large general insurance companies investigated the use of dynamic financial analysis for corporate decision making. Only a small number of insurers and reinsurers, many of which were European, were able to develop dynamic financial models that were adequate for use in decision making. The primary obstacles to implementation were actuarial knowledge and computer technology. By the early 2000s, technology had improved, actuaries had developed techniques that allowed better quantification of insurance risks and dynamic financial analysis had evolved into enterprise risk management (ERM) supported by economic capital models. With these improvements, regulators began to develop solvency rules that create incentives for insurers to implement economic capital models. Although the current impetus for economic capital models is regulatory, the original purpose of enhanced strategic decision making is still valid and companies that use their economic capital models for ERM will be industry leaders.
Corporate Decision Making Using Economic Capital Models: Part II: Identifying Capital Needs: Capital needs can be defined from a number of different perspectives:
- Regulatory: which focuses on the probability of insolvency;
- Rating agency: which focuses on both the probability of insolvency and the ability to continue with the current rating; and
- Going concern: which focuses on the ability to continue to implement current plans.
(Re)Insurance Innovation: Committing to the Leading Edge, Part I: Overview: The threats to which (re)insurers’ capital is exposed seem to multiply with alarming regularity. Today, the industry is contending with risks that were barely imaginable (at best) 20 years ago. In an age when carriers must respond to casualty catastrophes, the possible effects of climate change and financial market calamity - perhaps all on the same earnings call - it’s natural to wonder if the right tools and techniques for the job are available. Risk and capital management have only grown in complexity, a trajectory that is quite likely to continue - and probably accelerate.
(Re)Insurance Innovation: Committing to the Leading Edge: Part II: The Challenge of Innovation: Innovation can be a source of competitive advantage. A (re)insurer - or service provider (e.g., a reinsurance intermediary) - devises a solution to a particular challenge that the industry faces. It results in improved risk or capital management, for example, leading to enhanced margins, the optimization of capital deployment or expense management. Since the innovator - or early adopter of a service provider’s new idea - has access first, it realizes the benefit ahead of competitors that wait for the trend to crystallize.
(Re)Insurance Innovation: Committing to the Leading Edge, Part III: Get in the Game Early: Those who invest in and prioritize research and development - and introduce new tools and ideas - benefit from more than just the prestige of being first. Early movers define the standard to which others will have to adapt later. They shape the development of innovation, and thus its evolution, as it moves from a radically new idea to an accepted marketplace practice. In possessing this control, they hold the upper hand over their competitors, which become weighted with the burdens of the catch-up clamor.
(Re)Insurance Innovation: Committing to the Leading Edge, Part IV: Staying Out Front: Innovation must be continual, because of the lifecycle that governs it. If you’re not innovating (or adopting) now, you’re falling behind. The advantages of one innovative solution are quickly outpaced when another is developed or that same solution is adapted to new situations; and if the originator is not doing the work to make those leaps, the reputation of innovation can be quickly lost.
(Re)Insurance Innovation: Committing to the Leading Edge, Part V: The Elements of Innovation: Innovation requires a dedication to research, creativity, resources and foresight. Above all, however, it takes courage to accept the risks - to strive for success rather than cowering in fear of failure. In fact, the best companies learn from occasional mistakes. Learning from failure during the development stages of innovation strengthens a company’s capabilities. It creates an understanding of the issue at hand farther reaching and more in depth than that of the competitors which attach to the idea after it has been accepted as a standard. This understanding fosters a more effective use of that innovation as well as a platform from which to generate new ideas with the practical experience of what works and what does not.