OLDWICK, N.J.--(BUSINESS WIRE)--AM Best analysis shows that a strong majority of insurance companies understand the importance of enterprise risk management (ERM), with more than 90% of rated insurers possessing frameworks assessed at appropriate or better. However, given the escalation of risks in the U.S. economy, rising severity and frequency of weather events and the growing impact of social inflation, AM Best notes that ERM processes are not static and need to evolve along with an insurance company’s risk profile.
ERM is one of the main pillars of AM Best’s insurance rating process, along with balance sheet strength, operating performance and business profile. The ERM analysis is based on an understanding of an insurer’s risk management framework and risk management capability relative to its risk profile. The new Best’s Commentary, “Rising Economic Risks Highlight Importance of Enterprise Risk Management,” states that despite the appropriate or very strong ERM assessment for a significant majority of AM Best-rated entities, many insurers lack robust stress testing and reverse stress testing processes. Approximately 30% have stress testing assessments in the bottom three categories: evolving, nascent or unrecognizable.
“These companies often lack the capability to manage concentration risk effectively,” said Jason Hopper, associate director, industry research and analytics, AM Best. “In recent years, companies’ operating results have deteriorated due mainly to weather-related events and an increase in fire losses. Strengthening these ERM frameworks can further enhance understanding and management of risks.”
Along with stress testing, components of ERM programs include governance/risk culture, risk management and controls, risk identification/reporting and non-modeled risks and risk appetite/tolerance. A weak or nonexistent ERM framework can contribute to failures that can occur when insurers do not understand their key risks, which can lead to a failure to maintain adequate protection against stresses and shocks.
“The failures of Silicon Valley Bank and crypto firm FTX are two recent examples of insufficient risk management,” said Sridhar Manyem, senior director, industry research and analytics, AM Best. “Insurers may not be susceptible to a run-on-the-bank scenario, but SVB’s failure provides lessons pertaining to liquidity management and asset-liability risks. Strength and depth of management teams are also essential for an insurance company to execute its strategy, and at FTX, a lack of accountability of executives and board oversight led to poor management decision-making.”
As risks emerge and evolve, such as cyber liability, those insurers with well-developed ERM programs will be better equipped to identify and react, build and preserve balance sheet strength and bolster operating performance over the long term.
To access the full copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=331074.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
Copyright © 2023 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.