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How insurers should present their enterprise risk management programs to rating agencies

Insurance Consulting and Technology|Reinsurance

By Ralph Cagnetta | October 3, 2019

A recent Willis Re study of 20 insurers that received top ratings or the highest opinion from one or more of the rating agencies found they tended to have seven common characteristics.

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About our ‘A Year in the Life of the Strategic CRO’ series

In our ongoing A Year in the Life of the Strategic CRO series, risk experts from our Insurance Consulting and Technology team, Willis Re and other parts of Willis Towers Watson cover how a strategically focused CRO can drive corporate strategy through the enterprise risk management planning process and throughout the year.

Insurers that want to maximize their rating outcomes must present at least a summary of their enterprise risk management (ERM) programs to rating agencies. And the chief risk officer (CRO) is usually responsible for preparing and presenting this ERM to the rating agency presentation. But what makes for an effective presentation?

Start with the metrics

A good ERM presentation demonstrates how risk metrics are integrated into the business and functional area objectives. The best have a narrative and flow that suggests that ERM is embedded into financial planning, strategic decisions and performance measurement (and likely incentive compensation).

The presentation should make it clear to the rating analyst that the insurer follows established best practices for ERM and properly uses modeling tools to assist in its strategic decisions. A demonstration of ERM attributes (using case studies for example) may influence the rating agency to give the insurer the ERM assessment and rating they hope for. The practical application of a company’s ERM framework has become more prominent in discussions with rating agencies and can be a differentiator in maintaining a rating, if presented well.

On the other hand, the absence of practical examples can make responding to rating agency inquiries and defending against perceptions of weakness in an ERM program due to lagging performance or material events more difficult. While the ideal evidence of a strong ERM program is a prudent level of capital and successful performance, rating agencies also need to recognize in certain instances that companies are adhering to ERM best practices, but losses are also an inevitable consequence of being in the risk business.

7 common characteristics of the best rating-agency presentations

Besides the actual presentation, it is, of course, necessary to have a robust ERM program to present. Earlier this year, Willis Re conducted a study of 20 insurers that were either at the highest rating levels or with the highest opinion of ERM (very strong) from one or more of the rating agencies. The following seven aspects of their ERM programs showed up over and over again:

  1. Clear governance and board involvement — Regular reporting to and two-way discussion of risks and risk management with the board
  2. Risk appetite and risk strategy — Management knows what they seek to achieve with ERM and can tell why adhering to their risk appetite is important to the success of the company
  3. Aggregate view of risk for ERM decisions — Most ERM decisions are top down, starting from an assessment of the risk profile and the aggregate risk position
  4. Measure, report and react — An analytical framework supports risk assessments, which find their way onto regular reports; and problems that are shown on these reports prompt management to correct problems
  5. Organization and process — Lines of defense or another formal process is supported by those responsible and responsibilities are documented sufficiently to survive management turnover
  6. Formal underwriting guidelines and controls to enforce — ERM promotes transparency and discipline in the management of all key risks, which should start with underwriting for insurers
  7. ERM aligned with business strategy and targets — The most common objective of ERM, it needs to be both stated and shown

    As to that last point, alignment of ERM with strategy and targets can best be shown in a rating agency presentation by including the aspects of ERM that are also a part of each of the main topics for the entire rating agency presentation. For example, a typical presentation to A.M. Best would include a discussion of the company’s business profile, balance sheet, operating performance and ERM. To show tight alignment of ERM with business strategy, ERM considerations should be included in each section, not just mentioned in the ERM part of the presentation:
  • Business profile — This section includes a discussion of the company’s markets, products and distribution. It should also include discussion of both product concentration and geographic concentration, which would be ERM concerns in an aligned ERM program. Concentration risk can be addressed through the strategy of the company but also monitored and managed through the control processes of ERM.
  • Balance sheet — This section tends to be focused on capital strength. The A.M. Best BCAR model measures risk-adjusted capital needs. Therefore, it is entirely appropriate for BCAR to be used in management’s views of capital and risk appetite. Stress testing should also be mentioned in this section as it is used to assess the firm’s resilience.
  • Operating performance — Here the focus is on the earnings level and trend. Volatility of earnings is a key consideration for rating agencies and therefore a focus of ERM. The actions and attention of ERM with regard to earnings volatility should be included here.
  • ERM – This section of the rating presentation can include a brief reminder of the ERM activity already mentioned in the other sections, but should focus on the key aspects of the ERM framework as well as the specific ERM capabilities that A.M. Best focuses on relative to the company’s profile.

Rating agency evaluations of ERM are not simply box-checking exercises. It is important for insurers to continue making improvements toward strategic utilization of ERM in their businesses, which is a critical component of the rating agency recognition of the value of the company ERM framework.

Previously in the A Year in the Life of the Strategic CRO series: Mergers, acquisitions and the strategic chief risk officer 


Ralph Cagnetta
Executive Vice President, North America

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