While the U.S. insurance industry is making strides toward Risk Management and Own Risk Solvency Assessment Model Act readiness, a gap exists between the perception of RMORSA preparedness and the actual completeness of insurers' enterprise risk management frameworks, according to a new report.
PricewaterhouseCoopers (PwC), London, U.K., released this finding in its “2012 U.S. Insurance ERM & ORSA Readiness Survey.” The study is a continuation of PwC's two previous global ERM surveys, but exclusively targeted to the U.S. insurance market. The 65 survey participants comprised life, P&C and health insurance companies, covering U.S. headquartered international groups, U.S. domestic groups or companies, U.S. subsidiaries of European groups and U.S. subsidiaries of other foreign groups.
While 82 percent of the PwC survey respondents believe that their existing ERM processes are largely adequate for the requirements, 38 percent of company boards are not engaged or are only passively engaged in risk management, showing that risk governance may not be up to RMORSA standards.
In addition, 35 percent of companies indicate that they do not have a risk appetite linked to business strategy and financial goals, which is crucial to a comprehensive and effective ERM program.
The RMORSA Model Act, which is being implemented in state law, requires insurers to manage an ERM framework that is embedded within company operations by January 2015.
"Setting the risk strategy, implementing and validating a capital model and developing effective risk reporting capabilities could take a couple of years,” says Paul Delbridge, leader of PwC's risk and capital management services practice. “Our survey shows that many organizations may be underestimating the amount of work it will take to meet the RMORSA requirements.”
PwC's survey addressed the four main parts of an ERM program that directly influence RMORSA preparation: risk strategy, risk governance, risk management and risk quantification. Key findings in each of these areas include:
● Risk strategy—25 percent of companies report that risk appetite metrics are not part of the business planning process, while only 57 percent include some, highlighting a disconnect between risk management and strategic decision-making.
● Risk governance—More than 30 percent of companies do not have a dedicated chief risk officer, with three quarters of these insurers reporting that other positions cover the role, often on a part-time basis.
● Risk management—22 percent of companies report not having a formal process to address risk identification, with most of these insurers adopting an informal one to address risk identification. A small minority reported that they do not have or do not see a need for a formal process.
● Risk quantification—37 percent of companies are not using an economic capital measure in addition to the more traditional capital metrics of statutory capital, such as GAAP and rating agency capital.