22 March 2013 Insurance

Insurers’ gap between risk appetite and limits

A significant mismatch still exists between the risk appetite of insurers and their risk limit structure, according to a survey of insurance executives globally which assessed their enterprise risk management (ERM) practices.

While 74 per cent of insurers surveyed have defined risk appetite statements, just 43 per cent said this is consistent with their risk limit structure, according to the survey conducted by Towers Watson. Three quarters of executives surveyed said significant work remains to make risk appetite statements operational in their businesses.

“The ability to articulate risk appetite is a key foundation of risk management, as it defines the types of risk that an insurer seeks and how much risk it is able to take on,” said Ian Farr, global product leader for insurance ERM, Towers Watson. “But without effective implementation and relevant monitoring systems, a risk appetite statement will achieve little beyond a tick in the compliance box.”

The survey also found that the top two short-term priorities for ERM development globally are risk appetite (40 per cent of participants) and risk monitoring and reporting (39 per cent). It also revealed that businesses with risk appetite/tolerance statements in place are almost twice as likely to be satisfied with the contribution of ERM to business performance (60 per cent of participants) as those that do not (34 per cent).

But many companies have made significant progress since its last 2010 ERM survey, Towers Watson said. The proportion of respondents with documented risk appetite/tolerance statements in place increased from 59 per cent in 2010 to 74 per cent in 2012. Use of risk appetite has also increased substantially since 2010 in areas such as asset and investment strategy (from 66 per cent to 77 per cent) and strategic planning (from 55 per cent to 71 per cent).

“Insurers have made a lot of progress in developing risk appetite as a relatively high-level concept, but few have yet managed to comprehensively roll it out into business as usual,” said Farr. “This is likely to be a major focus of insurance ERM programmes over the next two years.”

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