A.M. Best ERM SRQ Response Survey. March 2012

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1 A.M. Best ERM SRQ Response Survey March 2012

2 Overview of A.M. Best s ERM SRQ section ERM section of SRQ added in 2011 to provide a consistent starting point for analyst discussions Key Questions Responses should be in line with a company s risk profile and what has previously been communicated to A.M. Best Risk Culture Risk Identification /Measurement /Monitoring Use of Capital Models Inflation Answering that a certain question is not being done is not necessarily a negative, but companies should justify why they don t need to do so Do you have a Chief Risk Officer or ERM committee? Define and quantify largest risk to financial strength Risk tolerances: how are they defined? Overall appetite, how is it monitored? Largest exposures at single location Yes/No Sensitivity Testing Proprietary & Confidential March

3 Study Overview 66 group / company responses to select 2010 SRQ questions related to ERM Results are shown as a distribution of responses; No company specific responses are provided For the response to Question 56b: Results are shown based upon the largest potential threat quantified in the response If a description was provided but the potential impact was not quantified, the result is depicted as Not Specified Study population distribution is comparable to surplus size and A.M. Best rating 2010 Financial Size Category (FSC) by Rating Units 50% Financial Industry Average ERM SRQ Study 45% Size Adjusted PHS Rating Rating 40% Category ($ Millions) Units % Units % 35% Class I to V Less than % % 30% Class VI 25 to % % 25% Class VII 50 to % % Class VIII 100 to % % 20% Class IX 250 to % % 15% Class X & XI 500 to 1, % % 10% Class XII to XV 1,000 to Greater % % 5% Total 1, % % 0% Ratings Distribution A++ A+ A A- B++ B+ B ERM SRQ Study Industry Proprietary & Confidential March

4 ERM SRQ Responses Risk Culture 55a. Does your rating unit have a Chief Risk Officer (CRO) or other Senior Level Officer who is responsible for ERM? 55e. How often does the CRO/Senior Officer/ERM committee report risk metrics & risk management activities to the Board? Blank 3% 6% 9% 26% No 14% 14% Yes 83% 3% 42% Annually Semi-Annually Quarterly Source: Based upon 2010 ERM SRQ responses for 66 clients Other Does not report Blank Proprietary & Confidential March

5 ERM SRQ Responses Risk Monitoring 56b. What has management identified to be its largest potential threat to the overall financial strength of the rating unit [by Risk Type]? 56f. How often are the material risk measured to see if their respective risk tolerances are exceeded? 15% 8% Blank 15.2% Not Specified 12.1% Liquidity 0.0% Strategic 4.5% 14% Oper 4.5% UW Credit 9.1% 30.3% 1% 41% Market 24.2% 0% 10% 20% 30% 40% 21% Source: Based upon 2010 ERM SRQ responses for 66 clients Annually Quarterly Monthly Weekly Other Blank Proprietary & Confidential March

6 ERM SRQ Responses Economic Capital Models 57a. Does the rating unit use an economic model to quantify its aggregate risk? Blank 4% 57b. If No [to 57a], describe how management determines its overall capital adequacy and allocation of capital to business units, lines or risk categories? Yes 29% Blank Other 12.8% 27.7% No 67% Multiple BCAR / RBC 27.7% 31.9% 0% 10% 20% 30% 40% Source: Based upon 2010 ERM SRQ responses for 66 clients Proprietary & Confidential March

7 ERM SRQ Responses Inflation 58a. Does your rating unit estimate the potential impact of future changes in general inflation on its current net loss reserve position? Blank 8% 58b. [If Yes to 58a], How often does your rating unit estimate the potential impact of future changes in general inflation on its current net loss reserve position? 4% 19% No 54% Yes 38% 8% 58% 11% Annually Semi-Annually Quarterly Other Blank Source: Based upon 2010 ERM SRQ responses for 66 clients Proprietary & Confidential March

8 2010 ERM SRQ Responses by Size of Company Question Entire Population PHS <$500M PHS >$500M Number Description Response % Response % Response % 55a Have CRO or Senior Level Office responsible Yes 83% Yes 77% Yes 100% 55e Frequency of reporting to board Quarterly 42% Quarterly 35% Quarterly 61% 56b Largest potential threat Underwriting 30% Undewriting 27% Undewriting 39% 56f Frequency of assesing risk tolerances exceeded Quarterly 41% Quarterly 35% Quarterly 56% 57a Economic Capital Model usage No 67% No 79% Yes 67% 57b If no, how is capital adequacy analyzed BCAR/RBC 32% Multiple 27% BCAR/RBC 67% 58a Estimate impact of inflation No 54% No 63% Yes 67% 58b If yes, how often Annually 58% Annually 50% Annually 67% A.M. Best does not have a one size fits all approach to ERM; understand each company s approach must be tailored to its risk profile As such, no ECM usage for smaller insurers is not an issue Most common response differs from overall study For question 55a, A.M. Best has published that it believes even smaller companies should have an ERM committee responsible for reviewing enterprise risk Proprietary & Confidential March

9 ERM Continues to Gain Importance in A.M. Best Rating Evaluation ERM is an important part of A.M. Best s analytical rating process In September 2011, A.M. Best released a special report on the industry s ERM SRQ responses. Some of their key comments were: While making progress, the industry still has a long way to go on ERM 90% of responses for risk tolerance were too broad or general Following the many challenges of 2011, we expect key ERM related discussion topics will be: Articulating a clear risk tolerance Lessons learned from 2011 Improvements to risk management While A.M. Best does not score ERM separately, going forward company reports will include a specific section on Risk Management A.M. Best ERM Framework Sr. Management E RM and EC Capital Management Traditional Risk Management Practices & Controls A.M. Best Categories of Risk Underwriting Risk Credit Risk Market Risk Strategic Risk Operational Risk Proprietary & Confidential March

10 Contact List Pat Matthews, CFA Aon Benfield Analytics t: Parr Schoolman, FCAS, MAAA, CERA Aon Benfield Analytics t: Proprietary & Confidential March