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Refocus

18 May 2004 Angelo Coppola

Results of an international survey conducted by Ernst & Young show that despite a recognised industry need to quantify risk, 65% of insurers are less than halfway through to implementing holistic risk and capital management frameworks.

The survey, conducted among the top 100 insurance companies across the globe, highlights the increased importance of and emphasis insurance companies place on risk measurement and capital management, as well as taking an enterprise-wide approach.

Commenting on the survey results, Philip Strachan, partner in Ernst & Young Financial Services, says 25% of insurers have no formal risk measurements and management framework implemented at the corporate level.

"Although insurers consider it important, the majority fell short when it came to enterprise-wide risk aggregation," Strachan says. "Only 15% have sophisticated approaches that takes cross-risk diversification into account."

The survey identified automation/streamlining (73%), resources (63%), data limitations (40%) and cultural acceptance/buy-in (43%) as the most significant remaining challenges.

Only 10% of insurers felt the benefits resulting from a sophisticated risk measurement / capital management system were not worth the cost.

Respondents cited greater awareness of risk across the organisations (41%), better discipline in the product development/pricing process (19%), decisions that would otherwise not have been made (16%) and better understanding of aggregate risk exposure across the company (8%) as the most significant benefits realized from a risk measurement and management process.

Strachan says while insurers are currently enhancing risk and capital management systems, they anticipate using these frameworks for communication with rating agencies (75%), operational improvements (73%), strategic asset allocation (43%) and improved hedging techniques (40%).

"Current trends, including business consolidation, globalisation, scare capital and the development of more complex insurance products have created a new risk environment," says Strachan.

"Integrating risk into operating strategies and bridging risk silos is no longer optional, but an imperative for survival, which will require a more sophisticated measurement approach and a commitment to understanding the assumed risk."

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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