Insurance News

Risk Assessment In Recession Can Save A Company, Says Expert

Posted on: April 4, 2009

Evaluating a corporation’s risk exposure during this time of economic upheaval can not only save money but could also mean the difference between surviving and not, according to experts at Marsh.

The insurance brokerage addressed the topic in a survey, “The Importance of ERM During Economic Upheaval,” and at an online conference, “Reducing Costs and Mitigating Risks: Key Strategies for the Economic Downturn.”

The poll of 149 public companies throughout the world found that 79 percent of respondents are employing some form of enterprise risk management (ERM).

As described in the Marsh report, ERM is “a disciplined and integrated approach that supports the alignment of strategy, process, governance, people and technology and allows organizations to identify, prioritize and effectively manage their critical risks.”

The authors of the report, Christy Kaufman and Julie Oh of Marsh and Howard Sherman of GovernanceMetrics International, said ERM is important because credit rating agencies are planning to incorporate ERM into their ratings.

They said this will mean a better credit rating with the quality of the ERM program. It also means that at a time when corporations can expect increased regulation in the future, those that have incorporated ERM into their culture, along with greater transparency, can expect to be rewarded with “lower stock price volatility, lower cost of capital and higher valuations,” they wrote.

“Despite the challenges associated with ERM, the effective implementation of these programs has become increasingly critical as businesses focus on ways to align strategy, process, governance, people and technology to remain competitive,” Ms. Kaufman, a vice president of Marsh’s Enterprise Risk Services and Solutions Practice, said in a statement.

“During the global economic crisis, a company’s ability to identify and respond to significant exposures before they erupt can mean the difference between survival and failure,” she added.

The majority of those employing ERM strategies did so between 2004 and 2007. The authors believe this might have been in response to corporate failures and a report about ERM that brought attention and standardization to the method.

The survey found that no single standard prevails, but for those who do use an ERM program the two most popular are COSO (Committee of Sponsoring Organizations of the Treadway Commission, http://www.coso.org) and AS/NZS 4360 (the Australian/New Zealand Standard). Both provide a best practices framework for ERM.

More than 33 percent said the biggest challenge for ERM is its integration into the company’s routine business process. Among other challenges are lack of metrics (27 percent), informality of the program (24 percent) and lack of tools (21 percent).

Addressing the more immediate insurance and risk management concerns, eight executives with Marsh and an attorney from the law firm Weil, Gotshal discussed the challenges clients face in their risk portfolios from the economic downturn.

Speaking on general terms about marketing the risk portfolio, Tracey Ant, managing director of Marsh’s national brokering practice, said while there is a slow stiffening of insurance market rates, competition remains. However, underwriters are asking for more details about the risk portfolio and clients need to be prepared for changes in their insurance purchases, she added.

She recommended that clients work closely with their broker in this current economic environment and look at all markets, despite having some valuable long-term relationships.

“You need an open mind to survive,” she noted.

The report and Marsh’s panel discussion are available online at http://www.marsh.com.

Copyright © 2009 by National Underwriter Property & Casualty Magazine.

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