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According to a survey “Embedding ERM – a tough nut to crack” released last week by advisory consultants, Towers Perrin, insurers in Europe are ahead of their US counterparts in practices such as usage of economic capital and embedding ERM in the organisation.
Over 350 Chief Finance Officers, Chief Actuaries and Chief Risk Officers from major insurance companies across the globe responded to questions on their ERM activities and approaches. European insurers (30% of responses), were generally happier with their progress on ERM that their counterparts in North America (50% of responses) – a result of the pressure of preparing for Solvency II. 52% of European firms have documented risk appetite (versus 42% in North America) and 78% calculate economic capital already (versus only 45% in NA) with 90% expecting to use economic capital in major strategic decisions within two year. 44% of respondents expected to be using economic capital within 12 months with the highest expectations being in Bermuda (the site of risk management for a number of UK insurers) and the UK.
Commenting on the survey, a spokesperson for Towers Perrin said, "If you look back about 20 years ago, things were different then. Europe has a lead in ERM now because back then the US had a half-decent system in the form of US GAAP while Europe was in the Dark Ages. Europe needed a decent solution, while there wasn’t the same demand for progress in the US. So Europe built its new systems and then evolved them. In addition, there is also the advent of Solvency II, the European Union’s effort to create a modern solvency regime that will help to ensure the financial stability of insurance companies by introducing more sophisticated solvency requirements, which will take better account of the risks the companies must deal with."
However, only 30% of all respondents said that they would incorporate risk measures of any kind into incentive compensation arrangements and only 10% use or plan to use economic capital for this purpose. Furthermore, 66% of insurers globally said that they have no future plans to use economic capital in incentive compensation. This response could be due to the fact that the survey was carried out in May and June of this year, before the peak of the financial crisis and before criticism of incentive packages had become widespread.
The results were also heavily skewed in favour of large firms with 84% calculating economic capital as against only 37% of small insurers. Across all insurers, operational risk was seen as the area in greater need of improvement with relatively fewer respondents being dissatisfied with their progress in insurance, credit and market risk.
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