While the implementation of ERM in the insurance industry has improved since 2004 study also conducted by PricewaterhouseCoopers, insurers still do not commonly consider risk when making decisions, such as new product offerings. Regulatory authorities and rating agencies now consider ERM capabilities when assessing the financial strength of a business.

Rising Expectations

Rating agencies like Standard and Poor’s, Fitch’s, and AM Best evaluate the quality of risk management when rating companies. The extent of a company’s implementation of ERM will affect the overall cost of capital and its availability, especially now when market liquidity is diminished. EU Solvency II requirements encourage a holistic and systematic approach to risk management. EU Solvency II and rating agencies consider the strength of risk monitoring, reporting and control, the integration of risk awareness into governance and decision-making, and risk-based capital allocation. Standard and Poor’s found that the ERM capabilities of 3% of 274 insurers reviewed in 2008 were rated excellent and 10% were rated strong. Most, however, were rated as adequate.

Risk Appetite and Decision-making

More than 65% of respondents believe that their ERM program enables them to communicate a portfolio view of risk to senior management. Forty percent of the insurers surveyed have a Board-level ERM committee and a quarter are considering establishing one. However, more than 75% of participants note that business units do not base their risk tolerances on the broad risk appetite and tolerance levels established by senior management. The study found limited alignment between risk appetite and how insurance businesses are managed. Shortcomings include limited consideration of risk appetite when changing strategic direction, developing new products, and enforcing underwriting and investment limits.

The Insurance Industry Risk Agenda

Effective ERM programs can help insurers maintain investor confidence, allocate scarce capital to achieve the best risk-adjusted return, and identify commercial opportunities. Insurers face increasing risks associated with complex product offerings and growing reliance on advanced models to predict return on investments. The limited availability of, or reliance on, risk information can lead to an overly cautious approach that limits potential returns or ties up capital that could be better invested. Poor risk information that is not timely or reliable may encourage a company to accept too much risk.

Emerging Risks and Opportunities

Nearly 70% of respondents have a process in place to identify emerging risks, though less than half are confident that the process is operating effectively. Less than 30% indicated that their processes for identifying emerging risks are fully developed and implemented in the areas of strategic, credit, operational, and compliance risk. The ability of insurers to respond to emerging opportunities is questionable given that more than a third do not use risk/reward considerations when making decisions. Only 10% have a process in place to align their assessment of emerging opportunities with their risk appetite.


ERM certainly matters in the insurance industry and in any business seeking to align its operations with its risk tolerance. The evaluation of risk management systems by regulators and rating agencies makes ERM compulsory for many businesses. To realize the full value of ERM, a holistic view of risk must be part of strategic decision-making at every level. When the company’s risk appetite is not considered on the business unit level, the risk tolerance of the unit often becomes misaligned with the risk tolerance of the company.

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ERM Enterprise Risk Management Initiative 2008-06-01