Can’t skip measuring Risk and still call it ERM
Many insurers are pushing ahead with ERM at the urging of new executives, boards, rating agencies and regulators. Few of those firms who have resisted ERM for many years have a history of measuring most of their risks.
But ERM is not one of those liberal arts like the study of English Literature. In Eng Lit, you may set up literature classification schemes, read materials, organize discussion groups and write papers. ERM can have those elements, but the heart of ERM is Risk Measurement. Comparing those risk measures to expectations and to prior period measures. If a company does not have Risk Measurement, then they do not have ERM.
That is the tough side of this discussion, the other side is that there are many ways to measure risks and most companies can implement several of them for each risk without the need for massive projects.
Here are a few of those measures, listed in order of increasing sophistication:
1. Risk Guesses (AKA Qualitative Risk Assessment)
– Guesses, feelings
– Behavioral Economics Biases
2. Key Risk Indicators (KRI)
– Risk is likely to be similar to …
3. Standard Factors
– AM Best, S&P, RBC
4. Historical Analysis
– Worst Loss in past 10 years as pct of base (premiums,assets).
5. Stress Tests
– Potential loss from historical or hypothetical scenario
6. Risk Models
– If the future is like the past …
– Or if the future is different from the past in this way …
More discussion of Risk Measurement on WillisWire:
Guide to ERM: Risk Measurement & ReportingPart 2 of a 14 part series
Risk Assessment – 55 other posts relating to risk measurement and risk assessment.