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The Actuary The magazine of the Institute & Faculty of Actuaries

Insurers failing to measure and manage risk culture

Almost half of insurers are failing to effectively measure and manage the risk culture within their organisations, according to a Towers Watson poll.

The firm warns that, in anticipation of the new Solvency II regime, insurance companies need to take steps to strengthen their risk cultures in the run-up to Solvency II as regulators and rating agencies increasingly focus on this, as part of their ongoing risk assessment.

The poll, conducted at a Towers Watson Solvency II seminar involving over 80 delegates from a wide range of insurance companies, shows that less than a third (29%) of insurers measure and manage the risk culture in their organisations.

The firm points to its previous research which showed that risk culture had a significant impact on business performance during the financial crisis and that organisations’ current risk culture hinders their current business performance.

Oliver Davidson, senior consultant at Towers Watson said: "Relying on processes and formalised controls is not enough to give regulators, and other interested third parties, confidence that an organisation is capable of good risk management. There will always be ways to circumvent the models, systems and controls. It is therefore necessary for senior management to encourage a strong risk culture where employees are risk aware, understand the consequences of their decisions and are confident in raising objections when necessary."

Some insurance companies said they had already made steps in strengthening the risk culture of their organisations. For example, by forming risk committees; by strengthening the role of the CRO; and by adjusting senior management incentive plans to have a greater element of risk focus.

Oliver Davidson said: "We see Solvency II as an opportunity to make a step change in risk culture within insurance companies. Central elements that we expect from an effective risk culture include committed leadership, effective governance structure with clear responsibilities and timely challenges, active learning from mistakes, incentives that reward thinking without the risk management objectives of the whole organisation. While it is encouraging to see some leader firms taking proactive steps to build a solid risk culture, for many more work is required."

According to Towers Watson, a further challenge insurance organisations face is the measurement of risk culture. The firm says that this can be achieved by using diagnostic tools which comprise a set of survey questions, in the same way that other aspects of the organisation are measured, specifically tailored to measure key aspects of risk culture in a financial services context.

Oliver Davidson said: "The best way to understand risk culture within an organisation is to engage directly with those employees who are involved and to capture free and frank views by using a survey. This can provide a rich source of data using standard and bespoke questions which can be analysed. It will help foster a cycle of continuous improvement by allowing management to benchmark against other organisations, track own performance over time and provide results at a sufficiently granular level so that remedial action, if necessary, can be applied."