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October 17, 2005
Ernst & Young Insurance Industry Outlook Identifies Trickle Down Impact of New Legislation and Regulatory Requirements; Companies Must Move Beyond Pure Compliance
The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP today released its quarterly outlook identifying the need to take risk management beyond legislative and regulatory compliance to the next level. As a result, insurers should consider conducting a "Bottom Up Risk Analysis" as well as transforming their actuarial risk measurement processes and corporations should reexamine the role of the risk manager.
Bottom Up Risk Analysis... First Step in the ERM Journey
Enterprise risk management (ERM) long recognized as an important objective, but placed on the back burner, is beginning to move to the top of the "CFO to do list" as companies become increasingly sensitized to the heightened need for enhanced risk governance, management and measurement. This includes an acknowledgment that there needs to be a more disciplined approach to risk measurement and risk management.
The first step for organizations looking to implement ERM is a Bottom Up Risk Analysis. Conducted by management and approved by the board of directors, the analysis must account for insurance risk, catastrophe risk, credit risk, market risk, operational risk, etc....with a defined corporate risk profile as the end product.
The corporate risk profile serves as the cornerstone for the development of an ERM strategy. It allows senior management to set risk policy and risk tolerances and offers a guide for assessing risk management and measurement processes and controls.
"Insurance companies are recognizing that when it comes to risk governance the minimum acceptable standards are not enough anymore," explains Doug French, Global Director, Insurance and Actuarial Advisory Services (IAAS), Ernst & Young LLP. "In the new regulatory environment, smart companies are creating best practices which will pay off for their stakeholders in the end."
Actuarial Transformation(SM)... Relieving the Growing Pressure
With the emergence of options and guarantees in insurance products, increasing external scrutiny from analysts and rating agencies and emphasis on the true economics and risks is driving the trend from rules-based to principles-based financial reporting with a significant added push coming from the NAIC in the form of upcoming C3 Phase II regulatory capital requirements. As companies prepare to make the shift there is further pressure on the actuarial function, which in many cases, is already struggling to keep pace with the ever increasing needs and complexity of the business.
It is becoming clear that existing actuarial systems and processes will need to be overhauled. As a result, leading companies are transforming their actuarial financial and risk measurement capabilities by implementing next generation software tools, redesigning their key actuarial processes, dramatically increasing computing power, and utilizing technology more effectively to achieve integrated and automated solutions.
"Trying to maintain the status quo in an increasing complex risk environment is a formula for failure," explains Michael Hughes, Senior Actuarial Advisor with Ernst & Young's IAAS. "With the significant level of regulatory and business changes that have occurred in the last few years band-aids won't cut it. It is time for a true overhaul."
404 Domino Effect... Reinventing the Role of the Corporate Insurance Risk Manager
To date, the job of the corporate risk manager has been focused on the purchase of insurance and the management of risks for which a transfer market exists. The passage and implementation of Sarbanes-Oxley 404 ("404") compliance has also changed the strategic role of the risk manager, or at least it should. Corporate risk managers must expand their knowledge base and interaction with accounting and internal and external audit in order to understand the results of 404 implementation and its impact on the risk management process. Information gathered from 404 can have a significant impact on risk identification, measurement, prioritization and assessment, affecting the marketing, financing and monitoring of the corporate insurance programs.
The imperative to identify and document risks and controls and monitor those enterprise risks has created an opportunity for risk managers to become involved in C-level strategy and planning. To perform in this expanded role, new skills and tools will be necessary as risk managers must be able to present ideas and strategies which dovetail with the goals and objectives of their audit committees. They will also need to decipher senior management concerns and then provide well-versed perspectives and solutions for operational and financial risk solutions to protect employees, assets and key stakeholders.
"There is an opportunity today for risk managers to serve in the executive suite as risk champions for their organizations," explains Bruce Zaccanti, National Practice Director with Ernst & Young's IAAS Insurance Risk Management practice. "Their success hinges on their ability to see the big picture, communicate clear and concise insurance information in the context of the balance sheet and financial statement account impact. They also need to be able to confirm to management that they have protected the interest of the employees, assets and shareholders while optimizing the use of corporate resources."
Posted by Tom Troceen