With the Solvency II Directive due to be released in 2007, can enterprise risk management help prepare the industry?
The role of chief risk officer (CRO) has long been a rather lonely pursuit. Not anymore. The CRO now increasingly has a key role in strategic business decisions, which is a direct reflection of the growing importance of enterprise risk management (ERM) for insurance and reinsurance companies.
ERM identifies the risks faced by an organisation and then takes the necessary steps to address them. Various pressures have pushed this highly sophisticated risk measurement technique up the agenda. Corporate scandals, Sarbanes Oxley and impending regulation have all been major drivers. And the rating agencies are also banging the ERM drum, saying an effective ERM approach will reflect favourably on an organisation's ratings.
For European insurers and reinsurers ERM should be an important means of complying with the impending Solvency II regime. Solvency II is expected to achieve for insurance what Basel II achieved for banking by linking regulatory capital requirements to risk. But now the onus will be on each individual company to measure its own internal risks and use this as a basis to set its own capital requirements, which will then need to be endorsed by the regulator.
ERM is an essential tool for Solvency II. And the signs are looking positive. According to the Ernst & Young Solvency II taskforce most European insurers and reinsurers view Solvency II as an opportunity to improve risk across their entire organisation and not as an additional regulatory burden. But while 80% have begun their implementation of Solvency II criteria, only 20% believe their current models comply with requirements. With UK companies leading the way (due to the UK Financial Services Authority's introduction of the individual capital assessment regime) the rest of the industry in Europe is not too far behind.
A key component of ERM is the risk assessment phase, which for most insurers and reinsurers, takes the form of economic capital (EC). EC, the process of determining the amount of capital required based on sophisticated risk modelling, is seen as a far more accurate measurement system than traditional capital assessment approaches. According to Tillinghast's most recent survey of risk and capital management practices among insurers, many are moving toward the use of EC as a risk management tool. Already at 99% in the UK, nearly two thirds of the survey's 200 international respondents calculate EC and an additional 19% said they were considering calculating EC.
While these are intriguing statistics, the main aim of this supplement is to get the industry's view on ERM, Solvency II and the wider implications. And who better to tackle this challenge than some of the leading rating agency, broking, risk, academic and actuarial experts within the industry.
Helen Yates, Editor
- PDF, Size 1.05 mb