Survey Shines a Light on Life Insurers’ ERM Practices

January 14, 2014| Von Joe Atamaniuk | L/H General Industry, Life | English

Region: U.S.

Our first Enterprise Risk Management Survey of life insurers was launched a year ago, and we have just recently finished touring the U.S. to review the results with our clients. The survey is a resource to them - providing some useful insights into the evolving risk management practices of U.S. life insurers. We conducted the research because so much regulatory attention is being paid to ERM-type studies and because rating agencies have been emphasizing strong risk management processes.

The survey focused on biometric risk assumptions, an area we believe to be largely ignored by other ERM research. It also inquired about hedging and reinsurance, and preparedness for the National Association of Insurance Commissioners (NAIC) Own Risk and Solvency Assessment (ORSA).

In our client meetings, with Chief Risk Officers attending, we discussed the survey results in greater detail than in the published document they received. It was an opportunity to benchmark their progress with ERM in comparison to five or six of their competitors. Clients were able to measure their preparedness compared to the overall group and then their selected peer group, and they seemed enlightened by the results.

One of the areas in the survey that illustrated a shortfall was tail risk. Over 80% of the companies considered this an important risk, but only 20% had developed a solution to address this risk. Some of the companies felt reinsurance had the potential to address this risk.

The survey included companies in different phases of their ERM implementation process. Some respondents primarily do qualitative ERM work, while at the other end of the spectrum are companies using stochastic analysis and integration of multiple models. Together they revealed some interesting insights; these bullets are just a taster:

  • Close to 100% of the participants cover all three types of potential hazards in their ERM work: asset/liability, operational and external risks.
  • Senior management, boards of directors and rating agencies are the primary audience of any ERM results.
  • A full 92% of companies used ERM results in their rating agency presentations; fewer than 20% integrate their ERM work with compensation for senior executives and even less for employees.
  • Of the measurement methods used to better understand risk tolerance, Value at Risk (VaR) is the most utilized. But a significant number of participants reported using other methods, notably measuring impact on capital/surplus, often at stress levels.
  • The large majority of participants reported using asset adequacy software that has been modified for ERM purposes, while only one company reported purchasing ERM-specific software.
  • Only 21% of participants reported changing their lapse rate assumptions when testing the impact of a pandemic. A greater share of participants (67%) reported including tests for pandemics and terrorism acts when stress testing mortality rates.

The companies that participated in the survey felt that the information was useful and would continue to participate in the future. We inquired if there were areas in the next survey they would like to see expanded, and several companies mentioned concentration of risk of reinsurance due to consolidation and operational risks.


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