Insurers keen to develop ERM systems to unlock business risk insights

04 October 2016 3 min. read

Enterprise risk management solutions within the insurance industry are on the increase, as their reactionary potential for dealing with risk events pays off. ERM systems, according to a new survey, may be able to provide a host of additional value added benefits to insurers in terms of additional information, risk transparency, for key business decision making.

The insurance industry is well versed in the area of risks. However, insurance enterprises themselves face risks from a host of directions, among others, from global economic uncertainties, new competition, compliance, as well as loss of talent.

In recent years, ERM systems have been developed that allow companies to better manage their enterprises’ risks. According to a new report from McKinsey & Company, titled ‘Transforming Enterprise Risk Management for Value in the Insurance Industry’, the possibilities within the ERM landscape around risk issues extend well beyond mere compliance measures. New ERM systems are able to provide transparency into risks/payoffs, whereby companies are better able to make decisions in line with strategic requirements. The survey for the report involves 27 insurers with more than $3 trillion in assets.

Risk transparency and insight top areas for improvement of ERM system

Increased ERM interest

According to the survey, executives within the insurance industry are considering ways in which to broaden the use of ERP for risk related insights that extend beyond reactionary measures to an event. McKinsey asked respondents to rank the areas in which they would like to see improvement to their ERM system. 32% of respondents cite risk IT and data analytics as the number one area in which they would like to see improvement, while 19% cite stress testing and risk reporting at 18%. Risk appetite and strategy and risk organisation and governance follow at 11% and 10% respectively.

In terms of their second improvement area, stress testing capabilities came out on top as cited by 26% of respondents, while 25% say that risk IT and data analytics was their second improvement area. Risk culture and performance transformation are also cited highly by respondents (23%) in terms of their second area of improvement.

Insurance industry still at start of gaining full ERM capabilities

Full ERM

The study highlights that for many organisations, ERM systems are currently seen as a means of reacting to incidents and meeting the requirements of new regulations, rather than a source of information for risk related decision making. According to the firm’s analysis, most insurers are at the risk quantification position on the capabilities potential of modern ERM systems – these systems provide few ways of adding value to businesses, outside of a focus on ex-post controls and compliance and meeting accounting and statutory metrics.

The second stage in the development of the ERM provides additional functionality for organisations, including loss control and risk-return optimisation, according to the firm. This means that “In ongoing dialogue with other functions (such as finance) and the business, risk managers proactively identify potential issues and, where helpful, challenge common practices. The function develops an understanding of corporate strategy and the ability to model economic capital (risk capital) and conduct stress testing. The function then converts the models into strategic input for top management.”

In its ‘ultimate stage’ ERM systems – when integrated within corporate strategy – provide insurers with a means of decision making that has as backing weighed risk-return implications and potential risk trade-offs. The latest ERM systems are able to provide, in a well formulated manner, comprehensive economic capital models “needed to drive business decisions and to link advanced risk analytics to key business processes.”