6 November 2009

Mike Learned, VP of SunGard iWorks, explains the importance of implementing effective enterprise risk management systems.

To support enterprise-wide decision-making and enterprise risk management (ERM), global insurers must transform and evolve into a true enterprise-enabled industry. To achieve this, they must partner with technology vendors that understand the complexities of risk-based information systems and can implement a comprehensive ERM framework to meet insurers’ goals and regulatory requirements.

The insurance industry is undergoing a significant transformation primarily driven by the impact of changes in world markets and an emphasis on improved capital management. Most governments are currently considering economic capital-based regulatory changes that focus on implementing effective ERM initiatives with the ultimate goal of providing policyholder protection and promoting better governance by the management team and board of directors.

The current economic crisis has highlighted the relevance of a risk-based solvency regime, resulting in increased attention to the EU’s Solvency II directive. One of the objectives of the regime is to elevate the standards of insurance companies’ management using ERM principles. Though the directive will place pressure on the insurer to develop an ERM strategy and required technology infrastructure, it should be also seen as an opportunity to ensure the resilience and agility of the organisation as a whole and gain a competitive advantage.

To effectively execute an ERM initiative, insurers must identify, measure, control, and monitor risks throughout the organisation. They must transform operations in order to: define risk strategy and appetite at the highest level and align risk decisions to risk tolerance; embed risk practices and change the culture to embrace risk management throughout the organisation; measure risk using modelling tools that evaluate assets/liabilities and their interactions; and rely on systems and data to provide accurate and timely information that enable improved, real-time capital management decisions.

To effectively execute an ERM initiative, insurers must identify, measure, control, and monitor risks throughout the organisation.

Mike Learned, SunGard It sounds like the logical evolution of an industry in the business of managing risk for others, doesn’t it? The answer is not as straightforward as it appears.

According to a recent Accenture survey, less than 20 per cent of respondents said they consider themselves well prepared for the start of Solvency II. Processes, IT systems, risk quantification and modelling capabilities are the areas where they see the most significant need for improvement.

Most insurers would surmise that cracking the ERM nut is a lot more complicated than simply stating lofty goals. According to Matthew Josefwicz, director of insurance practice at Novarica: “Few industries are so rich in customer, product and operational data, and yet so poor at extracting useful information from that data as the insurance industry.”

In the 1950s, insurers were the leading investors in information systems. Over the years, as technology has evolved, the insurance industry has not kept pace and now finds itself playing catch up to more tech-savvy markets like banking.

Insurers’ reliance on data-rich legacy systems has promoted a culture of redundant processes and a paper trail mentality. The emergence of specialised systems targeting specific functions has also sponsored siloed systems where information exchange happens on occasion, if at all, and relies heavily on manual processing.

So, in order to implement effective ERM, management must not only transform operations and corporate culture to change risk behaviours, but also evaluate systems and find ways to streamline processes in order to maximise technology investments. In short, the ERM puzzle is not only comprised of risk management pieces, but also information and technology management.

Before embarking on a large scale initiative, insurers must consult with technology vendors to better understand how new systems will be applied to existing processes, and how new processes can be introduced and streamlined to yield productivity gains. Because ERM deals with risk, it is also as important that solutions providers understand risk data through the entire insurance enterprise.

A fundamental requirement for regulatory regimes, like Solvency II, is to perform analytics and statistical analysis and modelling in a rigorous, auditable and transparent way. Insurers must be able to accurately model insurance, as well as credit and operational risk and aggregate data in order to provide a holistic view of the risk and demonstrate consistency of information appearing on both sides of the balance sheet.

Because ERM and new solvency regimes require sophisticated modelling techniques, calculation-intensive applications should use cloud computing, grid computing and other advanced technology for improved firepower and accuracy. Such systems must also be flexible and provide integration points to and from back-end and front-end systems as well as data marts and data warehouses to support business intelligence and reporting.

It is critical that insurers embrace technology advancements in data management and implement an integrated insurance data model.

Insurers must partner with a technology vendor that understands the complexities of risk-based information systems and the entire insurance enterprise environment and vendors must offer a consultative approach that values ERM initiatives. Finally, solution providers must offer a comprehensive ERM strategy based on technology leadership and innovation that not only supports the needs of the insurance market today, but is visionary and extensible to meet the growing needs of tomorrow.

Mike Learned, VP SunGard iWorks, SunGard

This article first appeared in the 2009/10 edition of the Finance on Windows Partner Guide.

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