ANALYSIS AND KNOWLEDGE FOR THE WORLD OF INSURANCE

Turning the science of ERM into an art

The science of corporate ‘enterprise’ risk management for insurers has developed exponentially over the last 10 years – from the silo based approach at the turn of the century, to the position today where even smaller re/insurers are considering the appointment of a CRO, a role that largely didn’t exist until the late 90’s.

ERM became a central plank of rating agency criteria in the mid ‘noughties’ and their expectation was, and remains, that it should be proportionate to the complexity and diversity of the rated insurer.  However, the rapid evolution of the discipline means that the ‘state of the art’ continues to evolve appreciably from year to year, and with that the hurdles at every level get higher.

Naturally there have been great advances in the scientific approaches to measuring and monitoring risk, and rating agencies will expect that a suitable level of science will have been implemented according to the needs of the insurer.  But there is another evolution taking place – that of the art of demonstrating how ERM is not just a concept that you understand at a management level, but one that is actually embedded in the operations and culture throughout the organisation.

Here at Litmus we are fortunate to see the detailed presentations that our clients make to the rating agencies at their Management Meetings with the analysts.  We have learned three key lessons from this –

Firstly, that sometimes even larger re/insurers can struggle to communicate their corporate approach, either by presenting aspirational slides or those that simply demonstrate their theoretical application but fail to deliver a real impression of cultural adoption of the proposed techniques.

Secondly, that the message is inconsistently delivered throughout the presentation – it’s not enough to merely have 12 slides out of 120 that highlight ERM; there needs to be consistent reference to the organisational risk culture that demonstrates that this is not merely a question of paying lip-service to the concepts.

Finally, that the fact that the state of the art is evolving means that even those that have a low need for sophisticated ERM are being dragged up – the hurdles are becoming higher at every level.

The irony is that while this is happening, the rating agencies are becoming more confident that the threats covered by ERM are being better managed.  So we move from a position where their expectations might have been that 15 or 20 slides out of, say, 120 are ERM-specific, to a position where they expect you to have nailed the message within 10 or 12 slides.

Recently we have been specifically engaged by a number of insurers to focus specifically on their ERM message – they have identified that if they are going to at least maintain the rating agency status quo, they’re going to have to keep evolving the message.  And that’s about understanding how the analysts will view each evolution.

We started with the science of risk management – and nothing’s changed there; but from a rating agency perspective, it’s the art of communicating your corporate approach which is going to continue to be an evolving challenge.

Peter Hughes
Managing Director
Litmus Analysis
12 September 2016

1 Comment
  1. Its been a fair while since I was a CRA analyst but I am sure this message of communication is as critical as ever.

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