March 31st, 2014

ERM Benchmark Review, 2013 Update: Part I

Posted at 1:00 AM ET

In April and October 2009, Guy Carpenter published two briefings titled “Risk Profile, Appetite and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness.” This briefing is an update of those studies that summarizes the information publicly disclosed on enterprise risk management (ERM) measures.

This update reinforces the conclusions from the previous briefings. Most (re)insurers are managing capital with metric-based frameworks and are publishing more about their risk management targets. This is certainly true for European carriers who are focusing on their risk management process in view of Solvency II, but also for companies in Asia Pacific, Bermuda and North America, which appear to be catching up with the disclosure quality of their European peers.

Relative to the 2009 briefings, this new study covers more (re)insurers. In light of the improving disclosures, additional information has been collected on internal models and catastrophe models.


There was a continued movement toward more robust enterprise-wide risk management practices in the period following the financial crises of 2002 and 2008. With the goal of greater transparency, both regulators and rating agencies have increased the emphasis on ERM-related disciplines in capital adequacy dialogues.

The ongoing sovereign bond crisis and the natural catastrophe events of the last few years are again showing how important it is today for insurance companies to comprehensively assess corporate risks by accounting for various risk sources as well as the correlation between them. In that respect, insurance regulators have been recently pushing for the creation of internal risk assessment tools. In particular, Solvency II has introduced Own Risk and Solvency Assessment (ORSA), which aims to implement a new aggregated risk management culture. Its intent is to create a consistent framework that ensures the connection between internal and external risk drivers. In the United States, beginning in 2015, regulators will be expected to require companies with more than USD500 million in direct premiums to file an annual ORSA summary report with regulators. The summary report would require the (re)insurers to report their risk management framework, assess their risk exposure and measure their solvency with respect to an articulated business plan.

Rating agencies continue to increase their focus on ERM policies, incorporating this information into their rating assessment models and requiring disclosure in data requests and ratings discussions.

Guy Carpenter supports the view that developing ERM discipline will help insurers make value-accretive decisions through the improved deployment of capital. With a thorough understanding of the basic concepts of enterprise-wide risk and the integration of this knowledge into the process of making strategic business decisions, (re)insurers will be better prepared to respond to the internal and external questions relating to risk and capital. This investment will provide companies and their stakeholders a better understanding of the size and direction of the risks underlying their enterprise value creation activities. More importantly, insurance and reinsurance firms will benefit by establishing hedging or reinsurance strategies to drive capital efficiencies and maximize stable risk-adjusted returns.

Link to Part II>>

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