The FINANCIAL — Economic capital models, more sophisticated catastrophe management and dynamic financial analysis are among the tools the U.S. property/casualty (P/C) industry has deployed over the past decade to step up implementation of enterprise risk management (ERM).
A.M. Best Co. has committed to making ERM a core part of the analytical rating process and is creating a common platform that applies to all insurers – large and small – that it rates. Beginning in 2010, A.M. Best included an ERM section in the Supplemental Rating Questionnaire (SRQ). This report delivers an ERM "status report" based on aggregated data gathered from this section of the SRQ.
- The ERM section of the SRQ principally examines the rating unit's risk culture; risk identification/measurement/monitoring; economic capital models/use test; and "what-if" scenarios for potential adverse events.
- Most rating units have a chief risk officer (CRO) or senior-level officer responsible for ERM, but 12% of rating units – principally small companies – said they have no CRO or ERM committee.
- Rating units identified the largest potential threats to overall financial strength by risk type, and estimated these threats' financial impact as a percentage of group policyholders' surplus; of concern to A.M. Best is that 15% of respondents felt they had no liquidity risk at all.
- Most respondents said they use their economic capital (EC) models to make key decisions on pricing, capital allocation and investments, but only 27% were using their EC models to determine any portion of management compensation.
- Although the industry is making progress in its efforts to improve its ERM, it would appear that the industry has a long way to go.
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