ERM: Time for an Honest Appraisal

Risk Management - Time for an Honest Appraisal | CTM Advisory

Risk Management | How Would You Rate it?

Let’s forget for a moment that insurance regulators and rating agencies have a predisposition to insurers that embrace enterprise risk management (ERM).

Are you satisfied with your organization’s investment in ERM?

Most insurance professionals, unfortunately, don’t see ERM as the transformational management tool that the pundits claim it to be.


“It’s time for us in the insurance industry to have an honest discussion about the aspects of ERM that add value to the strategy and planning process and those aspects that don’t.” — CTM Advisory


Proponents of ERM would argue that many insurers still haven’t invested the time, resource and commitment to realize the full benefits of a well structured risk governance program. We, of course, respectfully disagree and attribute the industry’s lack of success to some very basic but obvious missteps (see Negative Aspects of ERM below).

We would argue that the industry needs a fresh new approach to ERM and one that is grounded in reality not some academic’s view of how risk should be managed. In that regard, we have identified the following negative and positive aspects of ERM so we can begin the process of making it a more effective and value-added management tool.

The Negative Aspects of ERM:

  • Too Complicated:  The current practice of developing overly complex models and processes — that no one in the organization can understand but the few people who created them — reduces, in our opinion, the effectiveness of ERM. Risk management, like any other employee intensive initiative, requires the buy-in and support of all employees in order for it to be effective. How can management expect to achieve organizational buy-in when the people responsible for implementing the strategy do not fully understand the tools and processes by which management makes its decisions?

“How does the development of overly complex models and processes — that no one in the organization can understand but the few people who created them — make ERM a more effective management tool?”


  • Investment in Expensive, Irrelevant Models:  We understand the fascination with economic capital and that in many instances insurers are required by the NAIC and/or other regulatory authorities to develop their own proprietary economic capital model. We get it. The downside, however, is that these models are expensive to implement and offer limited value to insurers given regulators and rating agencies still use their own versions of risk based capital to determine how much capital an insurer must hold. 
  • Misplaced Responsibility:  Risk management is most effective when it is a shared responsibility not its own separate discipline. This practice of assigning responsibility to a Chief Risk Officer or department, why understandable, tends to misplace responsibility from where it truly belongs (i.e., front-line managers and employees).

The Positive Aspects of ERM:

  • Informs decision-making:  Perhaps the most important and single reason why risk management exists at all — to help management make informed decisions about which risks to take throughout the planning process.

ERM is a process that helps managers and employees to make informed decisions on which risks the organization should take. — CTM Advisory


  • Creates a Homogeneous Risk Culture:  Another positive aspect of ERM is it helps create a homogeneous risk culture (see blog ViewPoints – Risk Culture: Foundation of Risk Governance). It’s very important for leaders within any organization to set the tone and to demonstrate to its employees the kind of culture they want for the organization. Strong leadership combined with a well thought out risk governance framework can help facilitate that transformation.
  • Promotes Contingency Planning:  Sometimes bad things happen to good people no matter how well you plan or prepare for such a scenario. Risk management is not about eliminating risk. It’s about making choices of which risks to take and knowing how management can and will respond when bad things happen. A formal risk governance framework can help management properly prepare for unexpected tail type risks.

Parting Thoughts | Time for a New Approach

The current industry approach to risk management is expensive and in many instances ineffective, leaving many insurance executives dissatisfied.

That’s why CTM Advisory created — SMI Risk Solutions™ — a common sense, cost effective approach to risk management that helps small to medium-sized insurers (SMIs) develop a risk governance framework that succeeds in accomplishing the following objectives:

  • Enhances rating outcomes (viewed favorably by rating agencies)
  • Gives currently EXEMPT insurers a “head start” on eventual mandatory regulatory (“ORSA”) compliance
  • Adds rigor to the planning (decision-making) process
  • Directs the allocation of resources (financial and intellectual)
  • Creates a catalyst for making difficult but necessary organizational changes

About Us

CTM Enterprise Risk Advisers (“CTM Advisory”) is a Massachusetts based consulting group that provides credit rating and risk management support services to C-Suite insurance executives. All of our services are designed to fulfill our mission of helping insurers achieve their credit rating and risk management goals.

For more information about our services, please contact us.

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