Towers Watson touts near-real-time risk measurement for insurers

Risk management models are of limited value if insurance carriers are not able to produce reports that measure their actual level of risk, Towers Watson & Co. suggested in a recent report.

“Once an organization has set its risk tolerances and limits, the focus naturally shifts to a monitoring process that assures that actual risk levels stay within them,” New York City-based Towers Watson stated in a paper, titled Achieving Near-Real-Time Risk Monitoring.

“However, many companies have found that, having set tolerances and limits, they don’t actually have the risk measurement models in place to achieve effective and timely monitoring.”

That report is the second paper in a three-part series. Towers Watson published the first paper — titled Another Bite of the Apple: Risk Appetite Revisited — in August, 2013. A company spokesperson told Canadian Underwriter Friday that Towers Watson expects to publish the third paper in late March or early April.

In Another Bite of the Apple, Towers Watson had noted that insurers are concerned that risk appetite statements are “not sufficiently actionable” and that links between risk tolerance and limits are “tenuous at best.”

Then on Dec. 11, Towers Watson released Achieving Near-Real-Time Risk Monitoring, which touts the use of near-real-time enterprise risk measurement model to monitor risk appetite.

Towers Watson’s services include risk consulting, financial modeling software and reinsurance brokerage services. The company stated in a press release Jan. 8, 2104 that senior executives at insurance companies “are dissatisfied with the business advantages gained so far from the investment of time and money in developing risk appetite statements.”

In Achieving Near-Real-Time Risk Monitoring, Towers Watson included a case study of an amalgamation of several multinational insurance carriers writing personal and commercial insurance of multiple lines. Those firms were all “caught in the crosshairs” during the credit crisis several years ago when the mortgage-backed securities market in the U.S. collapsed.

During that crisis, Towers Watson noted, managers at several firms were asking chief risk officers daily “about risk levels relative to tolerances, and the impact on capital, earnings and liquidity,” but those chief risk officers were “inadequately prepared” to respond.

“Some have questioned the need for frequent measurement of actual risk levels, given that risk portfolios evolve slowly over time,” Towers Watson noted in Achieving Near-Real-Time Risk Monitoring. “This is true for many risk portfolios, such as an established block of auto insurance policies, where customer turnover is relatively slow, and growth is modest.

In these scenarios, Towers Watson suggested, “the amount of insurance risk won’t be expected to change very much from month to month, and monthly movements in the amount of aggregate insurance risk won’t be very interesting.”

But that argument “misses the point,” Towers Watson warned, because it is “in times of crisis, when the situation is changing dramatically, that management will be looking for real-time assessments to use in making critical decisions.”

In the third paper in its risk appetite series, Towers Watson said it plans to focus on the links between risk limits and risk tolerances.

“Risk limits are more granular than risk tolerances,” stated Towers Watson. “They are set for specific risk sources, business units or products, and are used to help implement the risk tolerances. Risk limits are often expressed using more practical metrics that are measurable and relevant to managers at the local level.”