These are the things that worry insurance company chief risk officers the most right now: confusing capital standards, more regulations and oversight, and integrating risk management with business functions.

In other words, CROs see those areas as creating plenty of uncertainty about what they do and how to successfully complete their jobs, Ernst & Young found in its fifth annual survey of these important insurance executives.

CROs see capital standards as they exist right now as confusing. The EY report notes, for example, that “the lack of common accounting standards and capital measures makes it difficult to compare performance and solvency across companies.”

With this in mind, insurers use different capital measures, sometimes unique to a specific company, to analyze risks exposures through different scenarios and over various time periods.

They also didn’t respond well to capital standard initiatives from the International Association of Insurance Supervisors or the Federal Reserve Board’s attempt earlier this year to look at bank capital standards and how they impact insurers under its supervision. Instead, EY said, insurers are proposing new approaches to how regulators address capital levels, and it noted “much work remains to be done in this area.”

CROs are coming to terms with regulatory oversight from the Federal Reserve Board in general, and see its reach broadening to companies that didn’t have to deal with the FRB in the past. What’s more they are resigned to the idea that attempts to reconcile federal and state regulations will lead to tougher requirements down the line.

“In the past, these CROs were confident that current state-based requirements would remain unchanged,” the report noted. “Now, they realize that the two regulatory regimes, with different risk management standards, are likely to converge around the more stringent guidelines.”

As far as changing risk management frameworks, CROs told EY that they’re spending more time and effort to integrate risk management practices into the business. According to the survey, this trend shows that risk management functions are “maturing” industrywide.

“That more business units themselves are expanding their risk management capabilities and hiring more risk staff shows how risk management has become a truly team sport played across and at every level of the enterprise,” the survey asserts.

Among some of the individual survey findings:

  • More than 70 percent of respondents said they’ve boosted staffing in their risk divisions during the previous year, due to stress testing, operational risk, ORSA and model risk management.
  • More than 40 percent of respondents said regulation and capital standards are among the biggest risk challenges facing today’s insurance industry.
  • 37 percent said they know from management dialogue/discussion that risk function is creating value.

Ernst & Young conducted its survey of senior risk executives from 20 North American insurance companies from December 2014 through February 2015, involving property/casualty, multiline and life insurers of all sizes.

With that in mind, EY places its responses in context. At the time, there was uncertainty in December as Congress initially failed to extend the Terrorism Risk Insurance Act. The International Association of Insurance Supervisors also released initial draft plans to test international capital standards. The Federal Reserve Board, at the time of the survey, was also looking at the impact of bank capital standards on insurance companies on insurance companies under its supervision.

Since then, Congress renewed TRIA and also modified the Collins Amendment, giving the FRB more flexibility in considering alternative capital standards for insurers under its jurisdiction.

Source: Ernst & Young