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Insurers With More Developed ERM Programs Are Seeing A Return On Their Investment, According To Towers Watson Survey

Stocks in this article: TW

Advancing Economic Capital Modeling

While insurers recognized the importance of economic capital modeling, they said its potential has not yet been realized, and it faces significant implementation challenges. Nearly three-fifths (56%) of North American respondents said methodology was the main challenge in calculating economic capital. Roughly three-fifths of North American respondents also cited reliability of modeled results (58%) and management buy-in (57%) as the top two challenges for embedding the use of economic capital in business decision making.

“Insurers not as far along in implementing ERM don’t have to jump straight into economic capital modeling,” said Scanlon. “Many find value in starting with scenario-based approaches that lead to stochastic modeling approaches. Similarly, companies can start by building on existing statutory or GAAP modeling and then bridge the gap with metrics they have traditionally used to manage the company while they take more time to implement an economic capital approach.”

ORSA Readiness

Over two-thirds (68%) of North American respondents indicated their company will be required by regulators, or intend themselves, to perform an Own Risk and Solvency Assessment (ORSA). When asked whether key aspects of the ORSA would generate significant or moderate benefits, over 81% said they would. However, insurers still have a long way to go before completing an ORSA. Only a minority of companies have outlined a road map for their project plan (20%), educated their boards on new oversight responsibilities (17%) or produced an initial ORSA “dry run” report (12%).

“Many insurers see ORSA dry runs as a valuable exercise to align key risk management processes and address key gaps within their ERM framework before the regulatory deadline,” said Simpson. “Successful companies will efficiently leverage their limited resources and focus their ORSA efforts on high-impact areas led by key risk mitigation, operationalizing risk appetite and embedding economic capital modeling into risk-based decisions.”

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