Stock prices of publicly traded insurers with stronger enterprise risk management programs show less stock price volatility than stock prices of carriers with weaker risk management programs.

Executive Summary

Every insurer has a unique strategy, capitalization, market position and an overall value proposition, and the same may be said for their approaches to ERM. It follows then that S&P's assessment of ERM should be—and is—tailored to each insurer's risk profile, focusing on five main areas to analyze whether the degree of risk management sophistication is appropriate for the risk profile. This article focuses on one of the five areas—risk culture.

At Standard & Poor’s we have found this to be the case in four of the last five years (2008-2012) based on an annual exercise carried out to compare the carriers’ ERM scores with their stock price movements.

As the chart below reveals, during 2012, the average level of stock price volatility was inversely related to our ERM scores (for both P/C and life/health insurers analyzed together). This is consistent with the patterns observed in all previous years except the first year of the financial crisis (2008), when insurers with strong and weak ERM scores across the board experienced the volatility that occurred across the market.

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