Insurance Marketplace Getting Serious about Enterprise Risk Management According to Ernst & Young Industry Outlook

Business Wire, April 10, 2006

NEW YORK -- The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP today released its quarterly insurance outlook addressing industry progress with respect to key Enterprise Risk Management (ERM) issues and announcing results of a new survey on the subject.

Pressure is On... Rating Agencies Raising the ERM Bar

Standard & Poor's (S&P) is currently implementing their new ERM criteria for insurance companies through their regular ratings process and other rating agencies are considering similar initiatives. This new external push is already having a significant impact on the insurance industry.

With the S&P ERM criteria underway, IAAS held a roundtable discussion with senior insurance executives and David Ingram, the Director of ERM, for S&P to address implications of the criteria as well as the expected timeline for compliance. During the discussion, Ingram shared current S&P thinking around the expectations and offered insight into the potential impact on ratings. Ingram also provided executives with guidance on how insurance companies can meet the demands of the new criteria.

Following Ingram's presentation, industry participants and Ernst & Young shared their thoughts on the criteria, the impact it will have as well as the challenges to implementation. Some challenges discussed included how to fit the S&P framework into a company's culture, the need for consistent measurement within the industry and the possibility of additional rating agency standards.

"As S&P evolves its ERM criteria and other rating agencies begin establishing their own expectations, insurance executives need to be aware of the various implications and challenges," according to Chris Karow, Partner, Ernst & Young LLP. "Despite an acknowledgment that ERM will take significant commitment and will be a building process, it is clear from the roundtable participants that insurers are building a roadmap and taking the initial steps in achieving ERM."

Governance, Measurement and Management... Surveying ERM Progress

In addition to the ERM criteria roundtable, IAAS also recently completed its "Insurance Industry Risk Leadership" survey. Building on a survey conducted in 2003, the study offers insight into the current state and future plans of insurers with respect to the three key components of ERM: risk governance, risk measurement, and risk management.

Asking respondents the top three drivers behind their ERM efforts, the survey found 91% citing better mitigation of existing risks within the organization, followed by 77% wanting to optimize the organization's risk taking potential and 45% focusing on improving their position with rating agencies.

While companies are making considerable progress in the area of risk governance with 92% saying they either have or are developing a formal risk policy document, risk measurement continues to be a challenge for the industry.

The survey examined interest and progress around economic capital (EC) finding 89% committed to using EC as a risk measurement framework. Among these respondents, 31% have fully operational EC methodologies, 25% are partially operational, 19% have methodologies under development and 25% have not begun development.

Additionally, only one-quarter (25%) of companies measure operational risks across their enterprise, 29% do not measure it at all and another third (33%) say they partially measure operational risk.

Asking companies where they have made significant changes in their risk management activities over the last two years, the survey revealed 87% focusing on process and controls, 78% on risk reviews of product design and pricing and 57% citing reinsurance.

"The 2005 survey data shows that ERM has come along way," adds Doug French, Global Director, of Ernst & Young's IAAS. "Insurers are realizing that ERM is not only important internally but it is also starting to be a mechanism third parties are using to assess companies. Now is the time for companies to drill down even further to implement key initiatives on their ERM journey."

The survey was conducted by invitation only in the Fall of 2005 among Chief Risk Officers and Chief Actuaries at the top 30 U.S. Life/Health and Property/Casualty insurance organizations. Preliminary survey results were the basis of a facilitated roundtable discussion held in New York in December.

Reports on the ERM criteria roundtable and survey results are available upon request. For a copy, please contact Francine Vassallo at fvassallo@psbpr.com or 212-752-8338.

About Ernst & Young IAAS

The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young includes 150 professional staff with more than 90 credentialed actuaries throughout the United States and Canada. IAAS delivers actionable business advice to its clients in the life/health and property/casualty insurance industries. It also provides insurance, risk management and claims advisory services to a range of businesses and corporations. IAAS employs financial modeling and other quantitative analysis techniques and technologies to assist clients in making decisions that will improve performance and achieve competitive advantage.