As Financial Sector Losses Mount, Embedding ERM into Business Practices Remains a Challenging Mission for Insurers According to Towers Perrin Survey.

North America Lags Europe in ERM Implementation; Operational Risk Remains a Weak Spot

STAMFORD, Conn. -- Insurers around the globe are finding it challenging to fully implement essential risk and capital management processes that would enable them to realize the full potential of enterprise risk management (ERM), according to Towers Perrin's 2008 insurance industry ERM survey.

Fully Embedding ERM Will Require Significant Effort

While insurance companies have made progress in integrating ERM into their business processes, more than half (55%) believe that substantial work is needed before they can use economic capital (EC) to guide risk-based decision making, and 60% noted that considerable strides must be made before they can link EC metrics to performance management. More than 40% remain focused on getting the basics right in their EC calculations.

Despite the acknowledged need for improvement, ERM is influencing many important strategic decisions according to the survey, which was conducted during May and June of 2008, prior to the global financial crisis. More than 30% of survey respondents have made changes to their company's risk strategy or appetite (36%), asset strategies (35%) and product pricing (31%) since the previous survey, conducted in 2006.

"The current crisis in the financial markets, the fragile state of the global economy and a North American hurricane season that has resulted in significant insured losses underscore the importance of having clearly defined risk strategies and tolerances in place," said Tricia Guinn, managing director of Towers Perrin's Risk & Financial Services segment. "Taking a holistic approach to risk management, one that connects a company's risk tolerance to the decisions it makes and the capital it holds, while fostering a culture of prudent risk management and risk taking at every level of its organization, has never been more crucial."

However, insurers appear reluctant to link compensation to risk taking. Only 30% of respondents indicate that they incorporate risk measures of any kind into incentive compensation arrangements, and only 10% use EC for this purpose. Furthermore, 66% of insurers globally have no future plans to use EC in incentive compensation.

European Insurers Are Leading Progress

European insurers lead their North American counterparts in the implementation of EC and its use in decision making. These capabilities, especially under Solvency II, are expected to lead to both lower capital requirements and a competitive advantage - in the short and long term - as illustrated in the survey findings. European insurers are giving greater short-term priority to the use of EC within their decision making processes (56%), compared to their brethren in North America (40%) and in the Asia/Pacific region (38%).

Additionally, within the next two years, European insurers said they expect to use EC in most major decision processes (80% to 90%), compared to North American firms (60% to 75%) and those companies in the Asia/Pacific region (50% to 65%).

Over half (52%) of European firms have documented their risk appetite, compared with only 40% of insurers in North America. Survey findings indicate that those same companies in Europe are also more apt to set risk limits for such day-to-day management issues as market risk (88%) than their counterparts in North America (61%).

"European insurers are implementing more sophisticated risk analyses that place them in a stronger position to demonstrate lower capital requirements," said Steve Taylor-Gooby, managing director of Towers Perrin's insurance consulting business. "Regulatory drivers are also raising awareness around risk mitigation, for example, hedging and reinsurance programs."

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About the Survey

Participants in the Web-based survey - the largest global survey of the insurance industry on the topic of ERM - included 359 insurance and reinsurance executives. Survey respondents were split between North America (49%) and the rest of the world, with 29% from Europe, 19% from the Asia/Pacific region, 2% from Latin America, and 1% from Africa and the Middle East.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information is available at www.towersperrin.com.