Australian insurers’ risk measurement frameworks lack sophistication, according to accountants Ernst & Young. A new survey of 35 Australian insurers concludes that companies acknowledge the value of upgrading their risk measurement methods, but regulatory, legislative and governance issues have dominated their attention.

Ernst & Young says the minimum standards of risk management and governance have risen recently and “it seems likely this trend will continue”.

“We expect to see pressure mount for more refined risk measures, if not from regulators, then from markets and boards. Those organisations [which] are furthest advanced will set the standards that others will be expected to follow.”

The report, initiated after the introduction of such measures as the Australian Stock Exchange’s principles of good corporate governance and the general insurance prudential reforms, says the next challenge for insurers who are able to produce realistic and consistent risk measures across all its risks and business lines will be to “infuse the use of these measures into its culture and decision-making process”.

The role of a chief risk officer is becoming the norm in insurance companies, the report says. “We would also expect, given current pressures to focus on risk, that this will tend to become a full-time role.”

It says sophisticated risk quantification provides insights that can be put into practice. “The respondents who had the most advanced risk and capital quantification capabilities told us that these measures had added insight on the basis of which they had taken action, or expected to do so. Most also believed that the benefits of sophisticated risk management outweigh the costs.”