Insurers operate in a world economy full of risk peppered with catastrophic incidents. While this environment offers unprecedented opportunities for growth, it has also substantially increased the chance for big claims. Large claims can stem from regulatory and legal action against clients, various natural and manmade disasters, supply chain failures, product liability and more.

For risk managers in property and casualty insurance, the greatest challenge lies in managing the ever-evolving risks and changes in a global economic and commercial landscape. As developing nations continue to grow and improve their economic status, the need for insurance solutions grows—as does the need for insurers to rethink their approach to risk management.

In today’s global landscape, the P&C industry has exposures in widely diverse locations and can be severely affected by concurrent catastrophic events. Risks are no longer simply geographically based. A port-destroying typhoon in Japan has implications for supply chains half a world away, and a meltdown in the credit market in New York has toxic effects across the entire globe. Companies must, therefore, examine their complete risk portfolios and the consequences associated with paying out claims when concurrent, cross-border catastrophes hit.

Enterprise risk management (ERM) provides risk managers, insurers and reinsurers alike the ability to more accurately measure the potential cost of risks against the profits earned by insuring them. If used properly, ERM can vastly improve claims reserving accuracy.

Enterprise Risk Management in Insurance
ERM is defined by the Casualty Actuarial Society as “the discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing the organization’s short- and long-term value to its stakeholders.” For insurers, ERM is a holistic approach to risk management that not only measures, mitigates and transfers risk across the enterprise, but also offers carriers a key opportunity to improve performance all along the insurance value chain.

For insurers and risk managers, particularly those with a global risk profile, an effective ERM program should be designed to help diversify risk and contain its expansion. In fact, multidimensional ERM can be leveraged to examine the impact that both risks and opportunities will have on current and prospective portfolios.