Focus on the right metrics. Companies need to reassess what
they measure, why they measure what they measure, and how
they use those measurements.
It now appears, for example, that many insurer ERM pro-
Integrate risk management into decision-making. Enterprise grams used peer data to justify risk levels and product features
risk metrics, appetites, tolerances, and limits have not suffi- rather than assessing the appropriate level of risk consistent with
ciently translated into clear operational guidelines, risk man- the insurer’s own risk appetite. Not only was the measurement
agement, or performance measurement. Ernst & Young’s 2007 logic biased; even tracking reports weren’t effectively utilized in
Insurance Risk Leadership Survey showed that while many decision-making. There were also gaps in the communication
companies already had or were in the process of finalizing and interpretation of the metrics and models. The industry must
formal statements about risk appetite, tolerances, and limits, break the pattern of selecting metrics based primarily on the
it was much less certain to what extent business divisions and pressure to keep up with the competition and take a more strate-business unit leadership had demonstrably bought into these gic approach to measuring risk, communicating the importance
policies and put them into practice. of the resulting data, and taking action based on the results.
Recent performance suggests insurers need to create mean- Looking back, there has been an overreliance on utilizing
ingful traction for risk governance and measures that result in historical data from recent prolonged periods of unusual low
better aggregation of risk within and across business units. Tol- volatility and sustained favorable markets. Moving forward,
erances and limits must be realistically calibrated to companies’ companies will now have a relevant contextual basis for ana-risk appetites, and systems must be in place to trigger alarms lyzing the highs and lows of cycles so that best- and worst-case
when breaches are imminent. events can be better anticipated.
Given the performance of the financial services sector as Life companies will have to improve their modeling
the credit and equity market crises unfolded, it is also clear that and stress-testing, particularly for liquidity under extreme
07-08.2009 Contingencies - JES ad:Layout 1 3/30/2009 4: 55 PM Page 1
there should be more weight placed on ERM in product design, scenarios. Property/casualty companies must revisit their
investment portfolio, and hedging management. modeling and stress-testing to account for the possibility of
ensure they will be prepared to navigate through the future
uncertainty and the systemic volatility inherent in the insurance industry.
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