“The findings and timing of this study – especially within the context of the onset of the current credit market woes and broader economic landscape – underscore the challenges the insurance industry faces in managing risk and opportunity,” said Patricia Guinn, managing director of Towers Perrin’s Risk and Financial Services segment. “Through the 20/20 vision provided by hindsight, we can say that many organizations in all business sectors underestimated risks or completely missed emerging risks, and that the levels of optimism and confidence the study revealed in the third quarter of 2007, as the current credit crisis and related economic issues were beginning to emerge, were not justified.”
Two hundred insurance industry executives were among the nearly 1,500 senior business executives who participated in the broad survey, including 69 whose firms have ERM ratings from S&P. The study sought to reveal what senior business managers consider the greatest threats to achieving their business goals, the most significant opportunities, and how confident they are in their ability to manage the risks and exploit the opportunities.
“Research conducted by behavioral scientists has consistently shown that people are almost always more confident in their estimates and predictions than outcomes warrant,” said Ms. Guinn. “A major benefit of a successfully implemented ERM program is that it tempers the potential for overconfidence and helps drive correct decision-making – both in the ability to manage risk and seize market opportunities.”
Survey participants, comprised of insurance company CEOs, CFOs, board members, presidents, managing directors and other senior executives, were asked to assess 27 internal and external forces affecting business performance in the areas of financial, people/workforce, operational and strategic issues.
Insurance companies’ broad range of approaches for monitoring a variety of risks across multiple dimensions, along with their ability to help mitigate and manage many of their clients’ risks, underscored their confidence, the survey indicated. As a result, insurance executives were at the top or near the top of the industries Towers Perrin surveyed in their confidence in managing various areas of risks and opportunities.
According to survey findings, 52% of executives from the insurance industry believe they are better able to manage all risks and opportunities than their peers, versus 51% of those leaders in other financial services and 47% of executives from the banking sector. Among all industry groups, only energy executives exhibited more confidence (54%).
Looking at specific risk categories, insurance executives were more confident about their ability to manage financial and people/workforce risks than all other industry groups, and among the most confident in their ability to manage operational and strategic risks.
However, executives from “Excellent” rated S&P insurance firms tended to be less overconfident (36%) than their peers with either “Strong,” “Adequate,” or “Weak” ratings (59%) in their ability to manage all risks and opportunities. Further, survey findings showed that only 14% of those companies rated “Excellent” by S&P were more willing to accept risk than their industry peers, compared with 31% with lesser ratings.
“Making good decisions requires a realistic view of what we know and what we don’t know,” said Prakash Shimpi, Towers Perrin’s ERM practice leader. “An ERM framework and the right tools for analysis can help executives make more informed decisions about which risks they want to avoid and whether they have the appetite to pursue opportunities to profit from certain risks.”
Insurance executives see several industry dynamics as potentially greater risks than a year ago, including “business development” (71%), “customer demand” (62%) and “competition” (50%). Those same executives indicated the biggest opportunity, according to the survey, is in the area of “technology.” Seventy-one percent of executives said that industry dynamic represents a greater opportunity versus a year ago.
New risks and opportunities will continue to emerge,” said Ms. Guinn. “The challenge for all business leaders – whether they are in the insurance arena or in other industries – is to maintain a consistent approach to risk and opportunity management in both prosperous and challenging economic climates.”
