Keep Your Eye on the Prize An ERM Update on the Global Insurance Industry April 2013 2012 Global Insurance ERM Survey Report Since our 2010 survey, Financial Crisis Puts the Spotlight on ERM, insurers have endured volatile investment markets, persistently low interest rates, and a number of major natural and man-made catastrophes. Meanwhile, insurance regulations around the world are undergoing significant change, adding to the uncertainty and in some regions drawing materially on resources, with unclear tangible benefits to the business. As insurers set priorities for 2013 and beyond, there is a need to focus on those aspects of enterprise risk management (ERM) that will truly add value to your business, and to “Keep Your Eye on the Prize” — the theme we have chosen for our 2012 Global Insurance ERM Survey. Keep Your Eye on the Prize An ERM Update on the Global Insurance Industry Table of Contents Executive Summary 2 Introduction 4 Seven Major Findings 6 Finding One: Insurers see the value in ERM 6 Figure 1: How ERM is expected to enhance business performance 7 Finding Two: The business impact of ERM continues to grow, albeit slowly 7 Figure 2: Business changes resulting from insurers’ ERM programs 7 Finding Three: Those that stay the course reap the rewards 8 Figure 3: Making progress with ERM enhances business performance 8 Finding Four: Risk culture is critical to long-term ERM success 9 Figure 4: Risk culture’s importance in the end-state vision of ERM 9 Finding Five: Defining risk appetite and monitoring against it are key short-term priorities 10 Figure 5: Risk appetite and risk monitoring are key short-term priorities 10 Figure 6: Substantial work is planned to make risk appetite operational 11 Finding Six: The potential of economic capital is yet to be realized 12 Figure 7: Management buy-in and robustness of results are the biggest barriers to increased use of economic capital in decision making 13 Finding Seven: ORSA/ICAAP is seen as beneficial by participants globally 13 Figure 8: Insurers still have some way to go before completing key ORSA components 14 Appendix: Select List of Participating Companies 15 Keep Your Eye on the Prize — An ERM Update on the Global Insurance Industry 1 Executive Summary Our previous survey on ERM in the insurance “ These findings provide a clear industry, entitled Financial Crisis Puts Spotlight on ERM, took place in 2010 and found only relatively picture of where the industry is modest levels of satisfaction with ERM’s business contribution during the preceding two years. and, more importantly, where Towers Watson’s latest biennial insurance ERM it is heading.” survey, our seventh, was held in July and August 2012, following a further two years of volatile 2010. Further positive impact will require a step markets and significant risk events across many change in thinking by many to integrate ERM different lines of business. The experience over into key business processes such as asset this period is a stark reminder that insurers need strategy, reinsurance strategy and performance to have a comprehensive understanding of risk if management. they are to successfully shape and execute their 3. Those that stay the course reap the rewards. business strategies in challenging and unpredictable The survey shows that insurers that persist and environments. progress toward full ERM implementation are Our 2012 survey looks at how insurers are more likely to see the benefits through enhanced progressing with their ERM efforts, with the aim business performance. For example, well- of generating value for the business. It shows advanced risk information systems contributed that many insurers that have made advances with much more strongly to business performance ERM do see their efforts rewarded with enhanced than less advanced systems. business performance. This trend is likely to 4. Risk culture is critical to long-term ERM continue as ERM capabilities are further enhanced, success. Our survey found that 80% of insurers making the development of ERM a strategic rate risk culture as a highly important component imperative if firms are to thrive in an increasingly of their end-state vision for ERM. Respondents sophisticated and competitive landscape. recognize the importance of risk culture in Our 2012 ERM survey report highlights seven key making ERM real, ensuring that day-to-day findings: behavior is aligned with the business’s desired approach to risk. 1. Insurers see the value in ERM. The majority of survey participants expect that ERM will enhance 5. Defining risk appetite and monitoring against it business performance and highlight two principal are key short-term priorities. Many participants ways in which ERM should add value. First, have prioritized work on the key areas required to they expect ERM to help prevent large losses make risk appetite operational in the business. that threaten the viability of the business, and Respondents recognize that for risk taking to second, they expect increased shareholder value be aligned with stakeholder expectations, it through enhanced risk/return decision making. is crucial that risk limits are consistent with the business’s risk appetite, and that risk 2. The business impact of ERM continues to taking is governed by suitable risk policies and grow, albeit slowly. Participants indicated that procedures. their ERM programs brought about increased levels of change in the business — for example, in pricing and management decision making. Even so, overall levels of satisfaction with ERM performance, and its perceived contribution to the business, have risen only minimally since 2 towerswatson.com 6. The potential of economic capital is yet to 7. ORSA/ICAAP* is seen as beneficial by be realized. Many participants recognize that participants globally. Almost all insurers that economic capital plays an important role in a are required to complete an ORSA (Own Risk and robust ERM framework, but face challenges in Solvency Assessment) or ICAAP (Internal Capital introducing it as a tool to manage the business. Adequacy Assessment Process) believe it will For many participants, the robustness and be beneficial for the business, although many of efficiency of economic capital calculations is the same insurers acknowledge the challenges often cited as a challenge, which in turn makes it involved in some of the technical aspects. difficult to gain management buy-in for its use in the business. 539 senior insurance executives from a wide range of insurers across the globe took part in the survey. Our 2012 survey report — Keep Your Eye on the Prize — details findings from our web- based survey of senior risk professionals, including chief risk officers (CROs), chief financial officers (CFOs), chief actuaries and other senior executives from insurers around the world. Survey respondents represented many of the world’s largest insurers; more than half have revenues in excess of $1 billion, and approximately 14% take in over $10 billion annually. Smaller firms — those with revenues of up to $1 billion — were also well represented, comprising 48% of the respondents. Participants covered a wide geographic spread of insurers, including companies from North America (37%), Europe (25%) and Asia Pacific (31%), with the remaining 7% coming from multiple regions. In addition, all lines of insurance business were covered, including life insurance (41%), property & casualty (P&C) insurance (25%), reinsurance (11%) and multilines (18%). Health insurers/reinsurers and other financial groups accounted for the remaining 5% of participants. We are grateful to the 539 senior executives from around the globe who took the time to participate in this survey and share their thoughts on these important issues. *Referred to as “ORSA” in the rest of this document Keep Your Eye on the Prize — An ERM Update on the Global Insurance Industry 3 Introduction These are challenging times for the global insurance industry. Substantial risks continue to weigh on investment markets, requiring a detailed understanding of the underlying drivers and potential outcomes. What’s more, the onset of a persistent low interest rate environment demands careful management of long-term insurance products and is putting pressure on the returns all insurers can expect to earn on their assets. Recent natural and man-made catastrophes have produced some large losses for the insurance industry. And insurance regulations around the world are undergoing significant change, adding to the uncertainty and often drawing significantly on resources — in many cases, with unclear tangible benefits to the business. Insurers need a sound understanding of risk to and ensuring that risk taking is controlled in line ensure that business models are adapted to cope with risk appetite — aspects that are all too easily with such challenges and thereby gain competitive deferred. Quantitative support for these decisions, advantage. Those that are able to take this such as economic capital assessments, must be understanding of risk to the forefront of decision robust, and their link to improved performance well making are more likely to achieve their objectives. understood. Now, more than ever, ERM leaders need to keep their eye on the prize if they are to be This is confirmed by results of the seventh biennial successful. Towers Watson Global Insurance ERM Survey, which reveal that ERM is strongly expected to add value Towers Watson insight on current issues and enhanced business performance is closely linked to ERM progress. Based on discussions with clients and our consulting experience, we have identified a number of questions However, the development of ERM needs to we think insurers should ask themselves in order to be carried out with a clear vision of how it will drive their ERM capabilities forward. improve business performance. In particular, our 2012 survey results illustrate that firms need to This is supplemented by our observations and insight address the challenge of embedding ERM within the on general industry activity in each area.