S&P: Most Insurers’ Enterprise Risk Management At Least Adequate

May 23, 2006

Any insurance organization without effective risk management faces losing its competitive position or, worse, exposing itself to unacceptable losses, according to an article published by Standard & Poor’s Ratings Services. The article, which is titled “Six Months After Rollout, Enterprise Risk Management Of 78 Major Insurers Evaluated,” explains how beginning in the fall of 2005, Standard & Poor’s began incorporating enterprise risk management (ERM) criteria into its insurance ratings to systematically reflect an insurer’s risk management. To date, S&P has used these criteria on 78 major rated insurers and reinsurers in Europe and North America and incorporated the results into these ratings.

ERM criteria monitor the ability of insurers to manage risk and financial volatility. “Insurers believe that this is good for the industry,” says David Ingram, a director of enterprise risk management at Standard & Poor’s. “Companies are trying to keep within a targeted range of volatility with regard to their financial results.” U.S. companies are especially interested in this new benchmark. There is no national regulatory agency or industry-wide trade group that has established ERM criteria, though the European Union’s Solvency II criteria are currently pending.

For most insurers, the ERM evaluation has had no effect on the ratings. For some, the evaluation provided important support for the rating decision, and for a few, it has contributed to a favorable rating action, S&P says. S&P believes that this is a testament to how seriously the industry takes risk-management issues and how effectively companies are dealing with them. In addition to finding only a few instances of insurers whose ERM evaluation has negatively affected the rating, S&P also found that among these 78 companies, only five were rated ‘weak’ in their overall ERM evaluations.

The good news from this is that although some insurers could use a stronger risk-management culture, 94 percent of the companies the rating agency evaluated so far have ERM classifications that are at least adequate for the rating.

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com, or a copy of the report may be purchased by calling (212) 438-9823 or sending an e-mail to research_request@standardandpoors.com.

Source: Standard & Poor’s

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