How do insurance companies structure their enterprise risk management framework?

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AcadiFi · Accepted Answer

Insurance ERM sits on three pillars: underwriting risk (pricing adequacy, reserve adequacy), investment risk (asset-liability mismatch, credit, market), and operational risk. A stylized insurer like Heliograph Mutual running $4.2B in gross written premium would allocate economic capital roughly 55% to underwriting, 30% to market/ALM, 10% to credit on corporate bond holdings, and 5% to operational. Governance flows from board-approved risk appetite down through a CRO who owns the Own Risk and Solvency Assessment (ORSA). Three lines of defense apply: actuarial and underwriting teams own first-line pricing discipline; ERM and compliance monitor; internal audit validates. Key metrics include combined ratio (<100% means underwriting profit), reserve adequacy ratios, and Solvency II SCR coverage. Stress tests model 1-in-200 year events across pandemic, natural catastrophe, and market crash scenarios simultaneously. Unlike banks, insurers hold liabilities for 20-40 years, so duration matching and longevity risk dominate the balance sheet view. Capital models must reconcile GAAP, statutory, and economic views — each tells a different story about solvency. For deeper coverage of insurance capital regimes, explore our FRM Part I Operational and Integrated Risk course.

How do insurance companies structure their enterprise risk management framework?

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