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Home > Insurance Markets Best Practice > Enterprise Risk Management and Solvency II

Insurance Markets Best Practice

Enterprise Risk Management and Solvency II

by Andy Davies

Executive Summary

  • The key components of ERM;

  • The dangers of overcomplicating processes;

  • How policies, risk strategy, and risk appetite are set;

  • Capital allocation and management;

  • The implications of Solvency II.


There is a great deal that the insurance sector has to come to terms with as it addresses the implications of Solvency II. There are broad general questions such as: What does it all mean? How will it be achieved and its requirements met? How much will it cost both from a capital and a monetary perspective? What resources are required? Then there is the related issue of how the International Financial Reporting Standards will fit with Solvency II.

Enterprise Risk Management: Culture Is the Key

Rating agencies, analysts, shareholders, and regulators are all taking more interest in capital models and enterprise risk management (ERM). Effective ERM acts as the common thread that links balance sheet strength, operating performance and business profile.”1

In an ideal ERM model, the risk management group will work with the board and all employees to ensure that their organization has effective ERM. It is fair to say that the majority of companies today have some form of ERM, but it is also true that for many this is an area that needs further development.

ERM is not about finding the perfect model, it is about having a strong risk- management culture which ensures that risk is understood, controlled, and effectively communicated. Effective ERM should be part of an insurance company’s DNA.

The key components of ERM are:

  • Aligning risk appetite and strategy;

  • Enhancing risk response decisions;

  • Reducing operational surprises and losses;

  • Identifying and managing multiple and cross-enterprise risks;

  • Seizing opportunities;

  • Improving the deployment of capital.

Management should consider the company’s risk appetite in evaluating its strategy, setting objectives, and developing mechanisms to manage related risks. ERM provides the rigour to identify and select alternative responses to risk—such as risk avoidance, risk reduction, risk sharing, and risk acceptance. Through ERM, companies enhance their ability to identify potential events and establish responses, thereby reducing surprises and associated costs or losses.

Every company faces a variety of risks that affect different parts of the organization, and ERM facilitates effective responses to such multiple risks. By considering a full range of potential events, management can identify and proactively realize opportunities.

Finally, obtaining robust risk information allows management to assess overall capital needs effectively and enhance capital allocation.

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