insurers, banks and other financial services companies have
experienced far more severe financial damage at the hands of the US
subprime residential mortgage debacle than others. A recent study
by the Senior Supervisors Group (SSG) concluded that the reason lay
in variations in the levels of adherence to effective enterprise
risk management (ERM).
In its finding the SSG, which comprises US, UK, French, German
and Swiss supervisory agencies, stressed that as a result of poor
ERM many companies failed to react to an array of data indicating
rising stress in the sub-prime mortgage market.
By contrast the SSG found that those companies that reacted in time
to the looming crisis had “demonstrated a comprehensive approach to
viewing firm-wide exposures and risk, sharing quantitative and
qualitative information more effectively across the firm and
engaging in more effective dialogue across the management
Against the background of the SSG’s findings, a study by
professional services firm PricewaterhouseCoopers (PwC) provides
valuable insight into ERM developments in North America, Europe and
the Asia-Pacific region. A total of 53 insurers were involved in
In some respects PwC’s findings point to an improvement compared
with a similar survey it conducted in 2004. In particular, PWC
found that ERM is now a strong board priority and chief risk
officers have an increasing influence on the design and monitoring
In addition 42 percent of respondents are “very confident” that ERM
is “embedded into their strategic planning” (compared with only 4
percent in 2004) while all other respondents are “fairly confident”
on this issue.
However, stressed PwC, most respondents are still grappling with
the technical and organisational challenges of implementing
effective ERM capabilities.
In particular, significant flaws in ERM exist in the
identification, monitoring and managing of emerging risks, areas
which given recent experience in credit markets should be a key
focus for insurers, stressed PwC.
In its survey PwC found that while nearly 70 percent of respondents
now have a process for identifying emerging risks, only 4 percent
of them are fully confident in their risk data and systems while
less than 40 percent believe they are good or excellent.
But even the best ERM programmes are only as good as their
effective integration throughout an organisation. Indeed PwC noted
that many companies worst-affected by the subprime crisis had what
they believed were sophisticated ERM capabilities. The problem of a
lack of organisation-wide understanding of the objectives and
responsibilities relating to ERM is significant.
PwC noted that 70 percent of respondents accept the enforcement of
risk thresholds is not operating effectively and that business
units within more than three-quarters of respondents do not base
their risk tolerances on the broad risk appetite and tolerance
levels set by senior management.
On a positive note, PwC stressed that it would not expect to find
fully mature ERM programmes. This, explained PwC, was be-cause ERM
is still a relatively young management discipline and key
components ranging from economic capital modeling to more
systematic operational risk management present new challenges for
Against this background PwC said that it is notable that its survey
found a strong commitment to further progress.
This includes continuing investment in economic capital modeling
and greater incorporation of the analysis into strategic planning,
along with the development and refinement of risk governance,
monitoring and reporting.
However, sounding a word of caution, PwC questioned how far ERM
programmes are being driven by heightened regulatory and rating
agency expectations rather than a genuine belief that ERM can
significantly enhance business performance.
ENTERPRISE RISK MANAGEMENT
Seven key attributes*
• Effective alignment of strategy and risk appetite.
• Ability to identify and accurately represent risk in a timely
manner within risk measurement, monitoring and reporting
• Better understanding of risk concentrations, correlations and
their potential implications based on effective risk
• Ability and readiness of senior management to understand and
where necessary challenge underlying risk assumptions.
• Effective communication of risk to decision-makers and
appropriate escalation of issues for action.
• Consistent implementation of risk management practices and
standards across businesses and geographies.
• Culture that builds risk considerations into performance
objectives and management in key areas.
*Of companies that avoided subprime problems
Source: Senior Supervisors Group; PricewaterhouseCoopers