Whether an insurance company’s leadership seeks to sustain or improve performance, accelerate growth, or simply survive in an increasingly challenging and dynamic environment, they need a sound strategy for moving forward.

Executive Summary

Failed strategies are among the biggest risks faced by P/C insurers, but few are integrating more robust analytics into their ERM as it applies to their strategic planning process, according to three advisors from Hanover Stone Solutions. Here, they provide a scenario analysis example to evaluate potential risks that might derail a carrier growth plan, complete with mitigation tactics—developed in advance—to put execution of strategic initiatives back on course.

Many leadership teams at property/casualty insurers rely on ongoing enterprise risk management (ERM) initiatives to identify opportunities and manage critical exposures. To be most effective, however, ERM must include detailed stress testing methodologies, such as scenario analysis to evaluate strategic risks along with financial and operational risks. This process facilitates in-depth assessments of critical risks that could short-circuit what might otherwise seem an excellent strategy.

Because the stakes involved in adopting any new strategic direction are so high, thorough analysis is critical. Strategies that fail because of undetected or unmitigated risks can result in a company’s demise. This certainly has been the case in past decades, with a number of P/C insurance companies falling victim to large losses from property catastrophes or due to asbestos, environmental and other liability exposures before the introduction and widespread adoption of ERM. More recently, we have seen insurers and reinsurers encounter serious problems with forays into financially oriented product lines or unique approaches to core lines of business without apparent attention to stress testing. To be an effective decision-making tool, the scenario analysis should incorporate a “what if” assessment relative to the uncertainties surrounding each significant element of the strategy (as we illustrate by example later).

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