September 29, 2011 – While enterprise risk management (ERM) is becoming increasingly pervasive in business decisions from the top-down, there are still gaps in the P&C industry’s usage, which renders guilty companies vulnerable to market volatility in terms of earnings and capital, according to a report from A.M. Best.

The ratings agency stressed its concern with a couple findings in particular. First, 15 percent of respondents felt they had “no liquidity risk whatsoever,” which could speak poorly to the projected condition of the overall market, and second, there was significant lacking when it came to the companies’ abilities to define their overall tolerance for risk. The report cited at least 90 percent of responses being too broad or general. The inadequate responses included phrases such as “highly conservative,” “primarily low, with some tolerance for medium” and “maintaining a Best’s Capital Adequacy Ratio score of 250.” Meanwhile, sufficient responses specified lines of business and ascribed their “volatility in average expected returns.”

Indicating an increasing awareness of ERM’s importance, on the other hand, chief risk officers were found at all but 12 percent of insurers included in the report—nearly two-thirds of those lacking the post were deemed “small companies with policyholders’ surplus of $50 million or less.” Another way to digest that stat would be to point out that a large majority of those companies without a senior officer responsible for ERM have most recently received a rating no higher than ‘B++’ from A.M. Best.

A similar case can be made of results to the question of whether strategies are driven by risk/return measures, with very high percentages dwindling with the size and ratings of the respondents.

The results come from data gathered in A.M. Best’s Supplemental Rating Questionnaire (SRQ) since 2010, when the ratings firm began including an ERM section. The sampling draws a representative tally of P&C insurers, excluding reinsurers.

This story originally appeared in Insurance Networking News.

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