ERM News comes in Threes

There are three news items about changes to approach by two rating agencies and a regulator.

  1. AM Best announced that they were adding two pages of ERM questions to their Supplemental Ratings Questionnaire (SRQ)
  2. S&P announced that they are now going forward with reviewing internal capital models for consideration in their view of capital adequacy.
  3. The IAIS has adopted an Insurance Core Principal (ICP 16) that requires that all insurance regulators adopt requirements that insurers should perform an Own Risk and Solvency Assessment (ORSA) and the NAIC will be starting to announce their plans for compliance with this in mid-February.

The place for insurers to stand and ignore ERM is shrinking quickly.

But Riskviews has noticed that when you talk people in the insurance industry about ERM, there are at least three different topics that they think about:

  • Economic Capital Modeling – a large fraction of people think that ERM means Economic Capital modeling.  So when they hear that rating agency or regulator wants to hear about ERM, they might say that they do not have one, so there is nothing to talk about.  The S&P announcement confirms their belief.  They read the Best SRQ questions and only see the spots that require numbers, completley ignoring as unimportant the parts about culture.
  • Compliance with rating agency or regulatory requirements.  These three news items are strong motivators for those who think that ERM is compliance.  These folks had heard AM Best asking about ERM, but saw no outcome from that process so they eventually lost interest in ERM themselves.  Now they are back to being interested.  The ORSA idea is confusing to these folks, because they already are doing their compliance regarding capital adequacy.  The ORSA seems like redundant regulation to them.  They do not see the shift of responsibility from the regulator to the board and management that is fundamental to the ORSA idea.
  • Management decision making.  These firms are using ERM to enhance their decision making processes.  They hear these announcements and are annoyed at the additional distraction from the real risk management.  Some of them will not change what they are doing at all to enhance their “score” with the rating agencies or regulators.  There is too much of the firm;s real value at stake to risk changing their risk management program to suit these outsiders who do not know much about the company or its risks.

The news comes in threes and the reactions comes in threes as well.

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Explore posts in the same categories: Compliance, Economic Capital, Regulatory Risk

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