Cutting-edge tools help firms hone their strategies holistically

PUBLISHED : Wednesday, 23 May, 2007, 12:00am
UPDATED : Wednesday, 23 May, 2007, 12:00am

Enterprise risk management (ERM) is a buzzword in the boardrooms of insurance companies as insurers realise the importance of assessing risk in a more holistic manner.

ERM is a systematic process of comprehensively identifying critical risks, quantifying their impact and implementing integrated strategies to maximise the value of the enterprise.

The enterprise risk management concept emerged in the banking sector in Europe in the 1990s at a time when the industry was coming under many strict regulatory controls.

While ERM can be applied to virtually any sector, insurance companies have readily embraced the implementation of the concept, realising that the need to manage risk is fundamental to operating a successful business. Threats of natural disasters, which may be rising due to environmental factors such as global warming, and terrorism make the implementation of ERM much more pertinent.

'Enterprise risk management is increasingly becoming more of a core competency for our clients,' said David Lightfoot, regional manager of reinsurance broker Guy Carpenter's Instrat division in the Asia-Pacific.

The Instrat unit uses cutting-edge quantitative proprietary tools, simulation modelling techniques and sophisticated models to profile and measure risk in all business sectors to help insurers evaluate the effectiveness of their reinsurance purchases in an ERM context.

'Insurance companies have been carrying out ERM to various degrees over the years, but the validation of the concept globally by regulators and rating agencies, as well as tangible benefits to those who have adopted ERM strategies, have given it increased momentum,' Mr Lightfoot said.

'Insurance companies in many countries can sell their policies more successfully if they have a better rating from a rating agency, and a strong ERM process can, in part, help them raise that rating,' he said.

Going far beyond the parameters of simply assessing insurance risk that involves looking at underwriting decisions, catastrophic risks and available reserves to pay for insurance claims, the coverage of ERM extends to examining asset, credit and operational risks.

Asset risk centres on issues of how the downturn of securities markets could have an impact on the company's assets, whereas credit risk involves the risk of not collecting the full value of its receivables, such as reinsurance. Operational risks examined the risk of loss from inadequate or failed internal processes, systems, strategies or reputation, Mr Lightfoot explained.

'The ERM process identifies risks in all these areas and prioritises them in terms of which risks will have the most impact and how they can be mitigated so that risk can be reduced to an acceptable level,' he said.

Guy Carpenter assists its clients - insurance companies - to study, measure and help mitigate these risks in accordance with the companies' business strategies and overall tolerance for risk. It has developed a suite of tools to facilitate many aspects of ERM. The company also offers advice on how the process can be done.

'ERM is not really something that should be totally outsourced because risk management is so fundamentally important to an insurance company. Insurance companies need to have ownership of their own ERM strategy, but we can certainly assist with several different aspects,' he said.

The company recently published a how-to guide that offers property and liability insurance clients practical advice on implementing enterprise risk analysis. The Enterprise Risk Analysis manual covers models and management frameworks, insurance hazard risks, financial risk models, operational risk and strategic risk.