Insurers Make Progress on Using Risk Appetite to Build Links With Their Business Operations

Insurers have a long way to go to link risk performance metrics into effective reporting systems

Arlington, VA (June 22, 2015) – Many more insurers across the globe now consider risk appetite and risk tolerance statements, the foundational elements of enterprise risk management (ERM), highly important to their company’s ultimate vision for their ERM program – a sizable 15-percentage-point increase compared to 2012 (76% versus 61%). Only risk culture (78%) ranked higher in importance. Yet insurers also recognize they have work to do around their risk appetite and risk tolerance statements. More than half (57%) expect to make further changes to both in the next two years, according to findings from global professional services company Towers Watson’s eighth biennial Global Enterprise Risk Management Survey.

Even as insurers acknowledge more work is needed to link their risk appetite to business operations, many now have a firm foundation in place to advance it. Most (84%) respondents have a documented risk appetite statement, compared to 74% in 2012 and 59% in 2010. Insurers have also made incremental progress with their risk limits: 82% – 88% have them in place for governing day-to-day risk taking, compared to 73% – 81% in 2012. However, significant work is planned, with over half (55% – 65%) expecting further development to their risk limits in the next two years.

“According to our research, insurers have made significant progress in the development of their risk appetite, which has laid the foundation for links with business operations,” said Mike Wilkinson, Towers Watson’s EMEA Risk and Solvency II leader. “This is encouraging, as a meaningful risk appetite is critical to really build your ERM framework into a useful tool for the business. Risk appetite metrics with risk limits help bring the framework to life for day-to-day risk taking, which has an extra impetus in Europe as Solvency II is implemented.”

Less than half (47%) say they have set up processes for external communication of risk exposure against risk appetite, while more than half (57%) indicate additional work is needed. The survey noted an increase in respondents’ internal processes for monitoring exposures against risk appetite (78%) compared to 2012 (68%), while most carriers (81%) plan to expand in this area. Seventy percent say substantial work is needed for the top-down, bottom-up consistency of risk limits and risk appetite.

“Risk appetite is complex, particularly when an insurer has to consider all its different risk types and potentially a range of very different businesses. Carriers must understand the impact of risk aggregation and diversification on the overall risk profile of a business,” said Wilkinson. “The risk appetite also needs to adapt to changing market dynamics to create an effective risk/reward decision-making process.”

Another important survey finding centered on the priority insurers place on risk performance metrics and reporting systems. Most (95%) said reporting systems that provide relevant, robust and timely information are highly (57%) or moderately (38%) important for their ERM program end-state vision, but getting it right has been difficult. Only 49% are more than halfway to their end-state vision for the allowance of risk within business processes, while 39% are less than halfway toward their end-state vision for economic capital calculation.

“Many insurers are comfortable articulating metrics for capital, liquidity and earnings at a very high level, but they almost immediately hit a steep uphill battle trying to figure out what it means for their business units and what it means to the front line in terms of setting limits, creating metrics they can monitor frequently and understanding how to actually achieve those metrics,” said Mark Mennemeyer, senior consultant, Americas Life practice.

Though most (87%) insurers agree economic capital is an important metric, its use hasn’t grown much. Two-thirds (67%) of carriers say they currently calculate economic capital, compared to 64% in 2012. For insurers that do calculate their economic capital, the survey distinguished trends regarding their primary measurement vehicle. The findings showed that insurers’ use of a one-year risk assessment period and tail value at risk has grown, while the use of value at risk has reduced.

“It’s not surprising the implementation of economic capital is taking insurers some time to achieve,” said Mennemeyer. “Companies can start reporting on metrics only once they’ve decided what they should be, defined how to measure them and collected the data to do so. These metrics then need to be accepted by the business as relevant and meaningful prior to implementing system changes. Insurers must commit to a long-term, staged implementation program to realize the full benefits of economic capital.”

About the Survey

Towers Watson’s eighth biennial survey on insurance ERM asked senior executives in major insurance companies around the world about the approaches to, and current status of, ERM activity within their companies. Over two-thirds of the 398 respondents were C-suite level. They included a wide range of organizations from North America, Europe, Asia Pacific and multiple regions from all lines of business, including life insurance (43%), property & casualty (30%), multiline insurers (13%) and reinsurance (11%).

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 15,000 associates around the world, the company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at