Rating agencies are placing more value on enterprise risk management (ERM), so it is critical for insurers to recognize the benefits of targeted investments in enhancing their organization's ERM capabilities.
The financial crisis demonstrated the resilience of the insurance industry in the face of certain types of systemic risk. Even so, the severe economic downturn hurt insurers' execution of business planning. One ripple effect of the financial crisis is the heightened focus of rating agencies and regulators on ERM and its role within the rating/regulatory process.
While ERM is not a new concept, its increasing influence on ratings and regulations cannot be ignored. As the methodologies employed by rating agencies and the reporting requirements set by regulators become more prospective in nature, ERM analysis as a leading indicator of a firm's ability to operate within a controlled risk/reward framework becomes that much more influential on how a company is rated or regulated.
What is now universally acknowledged is the value and benefit of a strong analytical framework that properly uses technology and modelling tools to assist in an organization's daily business decisions, aligning risk decisions with acceptable corporate-wide tolerance levels. The presence of these tools has yet to outwardly influence explicit rating agency or regulatory capital requirements, but the absence of these tools will increasingly make it more difficult for an organization to respond to regulatory and rating agency inquiries into management's view of its capital needs and the linkages to defined risk tolerance levels or risk appetite statements.
Rating agencies are increasingly recognizing correlations between ERM strength and company performance as risk management evaluations and the definition of strong ERM evolve, so that sophisticated tools are not just a luxury for only the largest, most complex organizations, but a necessity for all.