Strong underwriting controls are paramount: S&P
Maintaining underwriting and pricing controls will be vital for re/insurers going forward if they wish to improve their enterprise risk management (ERM) scores, according to two analysts at Standard & Poor’s (S&P) rating services, who spoke to PCI Today.
Kevin Ahern, managing director of financial services ratings for North American insurance, said that the results of S&P’s first ERM survey were not surprising. “What we’re showing is the correlation of preparedness in terms of who is prepared to address this from a regulatory standpoint, versus how we assess our opinion on how well they’re doing in terms of risk controls,” he said.
Ahern said that for primary writers and for their reinsurance counterparts, the sustainability of their underwriting controls and cat risk controls should be fundamental, and that the current low interest rate environment has forced them to this discipline.
In terms of ERM, S&P has dedicated a lot of time to assessing risk appetites and risk controls, which insurers are now going to have to demonstrate.
“What we look at in terms of ERM is evidence-based,” said Ahern. “If companies performed through various different cycles, we want to understand what differentiates them, and they need to articulate this now through self-assessment reports.
“This will be interesting because sometimes you go through an event and there’s an expectation that a control or a certain governance policy would have played out to mitigate it, but sometimes it doesn’t. So then ultimately you have to go back and reassess what that is.”
John Iten, director of financial services ratings for North American insurance, agreed with Ahern, adding that there is going to be very little change on the investment side.
“We’re not seeing a lot of players assuming additional investment risk in attempts to get higher returns—this has been very marginal,” Iten explained.
“Their controls are tight, and they’re really focusing on improving underwriting profitability to offset that loss of investment income, which is gradual.”
Iten concluded, “With interest rates still down at historically low levels, and with companies unsure of when they will go back up, it makes the underwriting discipline all the more important.”
