A new risk adjusted model for the insurance industry


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Many insurers are battling to come to terms with the increased emphasis on risk management required both by the current financial situation and new regulations. Accenture has developed a Risk-Adjusted Operating Model that provides a structured yet flexible approach to help them integrate risk management into the way they do business, and thus ultimately support the drive to achieve high performance.

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A new risk adjusted model for the insurance industry

  1. 1. A New Risk-Adjusted OperatingModel for the Insurance Industry
  2. 2. ContentThe New Challenges of Risk 3Integrating Risk into Key Business Processes 5Issues in Data Management 6Comprehensive Technological Solutions 6II. The Changing Role of Enterprise Risk Management 71. Ongoing market pressure2. Capital market innovations3. mproved business results through integration of risk and I core business processes4. Improved internal and regulatory reporting capabilitiesIII. The Accenture Approach: The Risk-Adjusted Operating Model 9Targeting and Delivering Value Diagnosis, Exploration and Blueprint DevelopmentBlueprintExecutionBenefits from Risk-Adjusted Operating Model 13Conclusion 14About the Authors 151 New Risk-Adjusted Operating Model
  3. 3. It has become clear - in the face of new regulatory andeconomic pressures – that insurers should increase their abilityto make risk-based decisions by incorporating risk managementinto key business processes.While compliance with Achieving full compliance integrating it into keyregulatory requirements through transformation business processes, thissuch as Solvency II in of Enterprise Risk objective is supportedEurope is a major concern, Management (ERM) most effectively. We haveinsurers have begun to functions will be a complex termed our approachrecognize that they need and costly undertaking, the Accenture Risk-more than just compliance; that may require extensive Adjusted Operating Modelrather, they should consider investment to support (RAOM), designed to helpfar-reaching, risk-focused long-term, profitable insurers improve their riskbusiness solutions to growth. Accenture believes capabilities to generateimprove their competitive that, by aligning risk additional value whileposition. with overall strategy and reducing costs. New Risk-Adjusted Operating Model 2
  4. 4. The New Challenges of RiskAnalysts, regulators and rating agencies are developing new guidelines andassessment criteria, including risk management capabilities and practices, inevaluating the soundness and integrity of insurers and the level of protectionafforded to their policyholders.3 New Risk-Adjusted Operating Model
  5. 5. Figure 1. Key challenges faced by risk management functionsAccenture 2011 Global Risk Study confirms that aligning risk with overall strategyand integrating it into key business processes while reducing costs are the keychallenges for the risk organizations Reducing risk management costs Improving risk Need for better Risk Management measurement and Integration with key Challenges modeling business processes Data management Aligning risk with (availability, consistency, the overall business quality) strategySource: AccentureAccenture’s 2011 Global Risk Study The major driver of cost in risk– conducted with C-Level executives management, however, is inconsistentat 48 global insurers – indicated that execution of risk management in keyinsurers see improving risk measurement business processes. The processesand modeling, reducing the cost of needed to identify, analyze, assess,risk management compliance, and report and respond to risks relatedintegrating risk and finance information to specific areas of responsibilityand processes within the organization are complex. Often, a consistent riskas the most significant challenges management framework – which shouldthey face. The insurers also want to serve as the base for execution of riskimprove their risk capabilities in internal management throughout the entirereporting, risk-adjusted performance company – is not in place. This createsmanagement, and the integration of a situation in which individuals involvedfinance and risk. (Figure 1) in different processes do not use the same standards and data for how toThe new regulatory requirements identify and assess risks, and how toincrease costs related to risk respond to these risks once they aremanagement. In particular, insurers identified. A standardized, integratedshould consider improving their approach to risk management for allquantitative and qualitative risk business processes –avoiding duplicativemanagement capabilities; reporting and processes and unnecessary activities —public disclosure; data management; can help minimize the costs associatedand overall risk governance. To meet with inconsistent execution.regulatory demands, insurers shouldupgrade their data collection, analytics,and reporting capabilities. New Risk-Adjusted Operating Model 4
  6. 6. Integrating Risk into Key BusinessProcessesAt many insurers, the organizational structure of the risk management function onlysupports ERM to minimize risks within a particular business process.Without a company-wide integration Developing a formal statement of riskof risk management, information used appetite poses challenges of its own.to assess risk in one core insurance Once the statement is formulated,process may not be available to assess it should be approved by all boardother business opportunities from a risk/ members, and then promoted internallyreward perspective. as guidance for the evaluation of business opportunities, risk assessmentNew regulations increase the burden and resource allocation within the entireon insurers to provide complete and organization. In addition, the ongoingtransparent documentation of all collaboration of risk managementprocesses which bear risks. While with front office, distribution, financethis can pose a significant challenge and operational functions should beto insurers, process documentation supported by dedicated processes toalso provides an opportunity review ensure that all business takes placethe existing process landscape and within the boundaries established by thecan serve as a mechanism to remodel risk appetite statement.existing processes, or even designnew ones. Similarly, risk management should be integrated into strategic planning toA formal statement of risk appetite can ensure that investments fully reflect theprovide a strategic direction for business risks involved. This integration enablesdecision-making. Such a statement the company to balance risk and rewardcan generate value by helping align in considering available opportunities.strategic objectives with risk tolerances, Many companies lack the common riskpreventing unwanted risk taking by vocabulary, the shared metrics and keyoperational units and fostering greater performance and risk indicators (KPIs/efficiency in the allocation of capital. KRIs) and the firm-wide access to dataThe risk appetite statement also signals (along with centralized databases)to stakeholders that the company has needed to fully integrate risk andestablished clear boundaries for overall financial information.risk taking.5 New Risk-Adjusted Operating Model
  7. 7. Issues in Data ManagementWithin the insurance industry, the sophisticated models needed for effective riskmanagement depend upon the availability of accurate and validated data, properlyorganized and delivered with the right level of detail and granularity.Insurers with multiple back-end systems Like data quality, data governance– or with information stored in silos that is very important for the effectiveare not accessible to groups that may management and use of informationrequire it – face challenges in providing by multiple stakeholders within theconsistent, high-quality data to the company. When ownership of data isrisk management function. The main unclear, redundant data sources mayproblem for insurers – once high-quality be in use without clearly assigneddata is obtained -- is the definition responsibilities as to the manipulation,and implementation of a framework retention or deletion of data.for data management to supportboth consistency and quality of datathroughout the organization.Comprehensive TechnologicalSolutionsMany insurance companies operate with a fragmented risk architecture that fails tosupport the full use of risk management tools and models within the context of theoverall business.As a result, there is a lack of systems should keep in mind the complementaryto provide an integrated view of nature of the various elements involvedrisk. A comprehensive, uniform IT in the transformation. For example,landscape – reflecting industry- improvement and integration ofspecific reference architecture as a IT architecture supports increasedstructure to enhance capabilities – is automation and makes it easier toneeded to support multiple functions provide robust IT support, which in turnand realize available synergies. helps to lower risk management costs.As they contemplate moving to a newrisk adjusted operating model, insurers New Risk-Adjusted Operating Model 6
  8. 8. II. The Changing Role of EnterpriseRisk ManagementThe contribution of Enterprise Risk Management (ERM) is changing and growing as theinformation provided by risk management is used to support value generation.For example, the Chief Operating Officer now takes advantage of risk managementcapabilities by integrating specific processes to support decision-making and valuegeneration. While ERM has been primarily a compliance-driven function that protectsthe value of the enterprise, it is increasingly strategy-driven, with a main focus onmaximizing and not just protecting enterprise value. The redesign of risk managementas a source of competitive advantage is now one of the primary objectives of theinsurance industry, with the potential to enable long-term profitable growth.7 New Risk-Adjusted Operating Model
  9. 9. Changing regulatory regimes such 3. Improved business 4. Improved internal andas Solvency II set a high priorityon actuarial and risk management results through integration regulatory reportingcapabilities. Under Solvency II, the of risk and core business capabilitiesactuarial and risk management functionshave clear roles and responsibilities, processes Within the scope of fulfilling riskwhich go far beyond standard activities regulatory reporting requirements thesuch as risk identification and modeling. Overall risk management can be industry is currently heavily engagedThe impact of these functions within the improved through the consideration in collecting data and developing/organization and on decision-making of risk in the decision-making process. implementing processes and systemsprocesses is high. For example, an effective integration for compliance such as quantitative of risk-based capital methodologies in reporting templates (QRT), SolvencyThere are a number of factors decision-making tool kits – requiring and Financial Condition Report (SFCR)contributing to this development: high data quality and a common metric and Regular Supervisory Report system such as one based on economic (RSR). In addition to these Solvency capital – can weigh both the combined1. Ongoing market pressure effects of risk-taking activity and the II specific requirements, industry will be challenged shortly to reflectGreater economic volatility in the impact of such activity on economic accounting specifics Internationalmarkets, accompanied by increased value. With economic capital models, Financial Reporting Standards (IFRS) asuncertainty, has generated pressure to insurers can optimize capital allocation well. By improving internal reportingimprove risk management capabilities. from a strategic risk vs. reward and operational reporting to supportInsurers are investing in more perspective, and gain a competitive risk-enhanced core insurance processessophisticated risk analytics tools to advantage by leveraging ERM and it will be crucial to provide consistencyimprove the measurement of rare economic capital modeling in their towards regulatory reporting andrisk events that carry a high degree strategic decision-making process. to make use of investments madeof severity for their portfolios. These in data governance and overall data Another source of competitivetools help, for instance, to reduce management. However, as regulatory advantage is the integration of risk andunderwriting risk, contributing to reporting and operational reporting finance processes within core insuranceprofitable and sustainable growth. on risk-enhanced insurance processes processes. Most insurers have not linkedOther companies may use sophisticated (e.g., product development, pricing) risk and adequate pricing with salesERM to create competitive advantage, might often have different requirements but those who do can gain full use ofmeaning that insurers might have to concerning the actuality and granularity risk-related information to supportimprove their ERM function to stay of underlying data, industry and IT dedicated sales activities. These canrelevant in the market as other players experts will be asked to align these then be tailored to client segments withuse ERM for sales activities, to gain implementations in a cost efficient and a better perspective on potential risksmarket share, for rating discussions, and synergetic manner. and rewards.other purposes. The combination of risk-adjusted2. Capital market metrics, traditional asset and liability management, and profitabilityinnovations performance measurements provides the company with a more balancedNew instruments such as mortality view of business performance. Anotherbonds, along with highly risky and/or benefit of integration is consistentcomplex assets such as hedge funds and data management between the risk andventure capital, call for sophisticated finance functions, resulting in lowerrisk management methods and tools costs, reduced financial risk and lowerto provide an accurate picture of required reserves.risk. These methods and tools willnot only help insurers manage theirexposures more effectively, they willhelp them capitalize on opportunities,improve organizational performanceand, ultimately, enhance long-termshareholder value. New Risk-Adjusted Operating Model 8
  10. 10. III. The Accenture Approach:The Risk-Adjusted Operating ModelWe believe that the multiple challenges inherent in integrating and improving riskmanagement are best addressed through a structured yet flexible approach. Thisallows for adaptation to the individual situation of each company and recognizes thematurity level of each company’s risk management capabilities.Accenture’s approach – which we have termed the Risk-Adjusted Operating Model –seeks to align organization, processes and architecture to ensure the development ofrobust risk management capabilities and to generate benefits for the business as awhole. This is a step-by-step effort based on client specifics. (Figure 2)9 New Risk-Adjusted Operating Model
  11. 11. Figure 2. The Accenture Risk-Adjusted Operating Model ApproachAccenture’s Risk-Adjusted Operating Model Approach can help clients develop robust risk management capabilitiesthat are aligned with their target level of sophistication Delivering Value: Program Management, Communication, Change Management and Value Realization Target and Diagnose and Blueprint Execute Deliver Value Explore Solutions Design Implement changes High Level Strategic Gap Analysis and Assessment Closure ApproachSource: AccentureTargeting and Delivering ValueThe Risk-Adjusted Operating Model operations, risk capabilities, processes the client’s key financial metrics, totypically begins with a high-level and systems. (Figure 3) estimate potential costs and benefits.strategic assessment, designed to Other key considerations include again an understanding of the client’s Working in tandem, the client and review of industry benchmarks and thesituation. The key objective is to Accenture identify adjustment initiatives likelihood of quick “wins” in addition toidentify attractive opportunities for for the existing operating model and medium- or long-term initiatives withadding value, which are then tracked a timeline for implementation. The corresponding benefits. Activities withinand measured over the life of the business case is calculated, based on this phase are supported by Accenture’sproject. The assessment also seeks to client specifics including the complexity ready-to-use assets for quick and cost-leverage the company’s own expertise of the business, the maturity of existing effective assessment.and experience to evaluate existing risk management capabilities, andFigure 3. Strategic assessment to identify opportunities for adding valueGaining an understanding of the client’s situation and challenges helps identify high level opportunities for creatingvalue, which are then tracked and measured over the life of the project • High level diagnostic of current risk management capabilities (Maturity Assessment) • Operating model adjustments identified and socialized Target and Deliver Value • Indicative industry benefit benchmarks • Strategic assessment to define business case for diagnostic and to identify High Level Strategic compliance opportunities Assessment • Metrics definition to track resultsSource: Accenture New Risk-Adjusted Operating Model 10
  12. 12. Diagnosis, Exploration and Blueprint DevelopmentThe next step in the development of industry best practices, and also assessthe Risk-Adjusted Operating Model is current capabilities against regulatoryan in-depth assessment of the client’s requirements. We identify areas formarket, business model and operating improvement in processes, policies,model to identify areas for improvement data, measurement and organization,and opportunities for value capture. formulating options for possibleTogether the client and Accenture solutions and outlining both costs andbenchmark and assess the existing benefits with the help of transparentrisk management function, processes, business cases which are linked to thetechnology and data capabilities against identified areas of adjustment. (Figure 4)Figure 4. In-depth assessment to identify areas of improvement for value capturePerforming an in-depth assessment of a client’s market, business and operating models help identify improvementareas and options for additional value capture • Benchmark risk management function • Assess existing risk management processes, technology and data Diagnose capabilities against the industry best practices and Explore • Adjustments to operating model defined and considering: -Strategy Gap Analysis and -Organizational design Closure Approach -Process and technology architectures -Sourcing strategySource: AccentureBlueprintOnce options have been selected, they capture identified value. Some changesare translated into concrete, detailed in the operating model and its specificand actionable recommendations, processes might be supported byincluding adjustments to the existing adjustments in IT capabilities to ensureoperating model and processes, to allow cost efficiency. (Figure 5)execution teams to implement them andFigure 5. Translating options into actionable recommendationsTranslating high level options into concrete, detailed, and actionable recommendations at the capability level enableexecution teams to implement and capture value • Design required organization adjustments (functions and processes) • Software requirements identified and software selection conducted Blueprint • Implementation roadmap defined Solutions Design • Business case for change developedSource: Accenture11 New Risk-Adjusted Operating Model
  13. 13. ExecutionIn collaboration with the client, • Processes: Developing relevantAccenture works to implement change processes to enable change whilein ways that support value creation integrating both risk processes and corewhile maintaining momentum and insurance processesorganizational alignment. (Figure 6) • Technology architecture:Implementation of the Risk-Adjusted Consideration of implications to dataOperating Model takes place on several and IT systems (e.g. enhancement oflevels, including: existing core-insurance software, data flows and reporting capabilities)• Organization and governance:Designing a logical, customized As part of the execution of the changeoperating model and rolling out the new program, Accenture and the client teamrisk policy and strategy establish training initiatives, gather feedback from participants and make necessary adjustments.Figure 6. Implementing the model across levelsWorking collaboratively with the client to implement the model change helps maintains value creation, momentum,and organizational alignment, while transferring skills and knowledge along the way • Adjusted operating model implemented on following levels: Organization and Governance, Processes and Technology Architecture Execute • Efficient and effective risk function supporting the business units • Strong risk culture across the organization Implement changesSource: Accenture New Risk-Adjusted Operating Model 12
  14. 14. Benefits from Risk-AdjustedOperating ModelDesign and implementation of the Risk Adjusted Operating Model can yield significantbenefits to insurers:• Value Generation through • Enhanced operational efficiencywide contribution and usage of through an integrated and robust ITrisk management capabilities to landscape, with a comprehensive andsupport decision making and value common IT landscape for multiplegenerating processes; functions reducing risk management costs and increasing operational• Improved business decision- efficiency through improvedmaking through alignment of overall automation and a consistent datarisk appetite and business strategy, management and quality framework.helping increase the efficiency ofcapital utilization;• Improved business resultsthrough integration of risk andcore insurance processes andalignment of processes and systems– with alignment helping to reduceduplication of effort and non-value added activities – and dataintegration providing the platformfor embedding risk withinthe business;13 New Risk-Adjusted Operating Model
  15. 15. ConclusionRisk considerations should be integrated into all decisions regarding operations, capitalmanagement and management processes. Accenture’s Risk-Adjusted Operating Modelhelps companies manage their enterprise-wide risks and aligns the risk managementprogram with business and regulatory concerns.By facilitating the achievement of Within these projects, Accenture hasstrategic and operational objectives, helped clients from strategic conceptthis new model provides multiple through project managementapproaches to measure and through development and integrationmanage risks. of IT applications. Accenture has the assets and practices to help clientsThis approach is based upon obtain desired outcomes throughAccenture’s extensive experience the Risk-Adjusted Operating Model.in delivering comprehensive, end-to-end risk management projects. New Risk-Adjusted Operating Model 14
  16. 16. About the Authors About AccentureEva Dewor Management ConsultingEva Dewor is an executive director, Accenture is a leading provider ofresponsible for Risk Management in management consulting servicesGermany, Europe, Africa and Latin worldwide. Drawing on the extensiveAmerica, Insurance area. Based in Munich experience of its 16,000 managementand with over 16 years of consulting consultants globally, Accentureexperience, Eva Dewor specializes in Management Consulting works withhelping organizations enhance their risk companies and governments to achievemanagement capabilities through its high performance by combining broadintegration in decision making, steering and deep industry knowledge withand reporting. Working with risk executives functional capabilities to provideof multinationals from across the financial services in Strategy, Analytics, Customerservices industries, Eva helps them become Relationship Management, Finance andhigh-performance businesses. Enterprise Performance, Operations, Risk Management, Sustainability, and Talent and Organization.Markus SalcheggerMarkus Salchegger is a senior director,responsible for Risk Management Insurance About Accenture Riskin Austria, Germany and Switzerland. ManagementMarkus Salchegger holds a PhD inMathematics, and over the past 15 years, Accenture Risk Management consultinghe has used his extensive experience in services work with clients to create andinsurance, reinsurance, banking, asset implement integrated risk managementmanagement and software development capabilities designed to gain higherto analyze, design and deploy solutions economic returns, improve shareholderfor risk management and financial service value and increase stakeholder confidence.applications that help clients become high-performance businesses. About AccentureDaniel Kimmerle Accenture is a global management consulting, technology services andDaniel is a manager -Risk Management, outsourcing company, with more thanbased in Munich. Daniel uses his extensive 246,000 people serving clients inexperience in risk management and more than 120 countries. Combiningcompliance to support insurers and unparalleled experience, comprehensivereinsurers in analyzing, designing and capabilities across all industries andimplementing their risk management business functions, and extensivesolutions and helping them comply with research on the world’s most successfulregulatory requirements and become companies, Accenture collaborates withhigh-performance businesses. clients to help them become high- performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.Copyright © 2012 AccentureAll rights reserved. 12-1528Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.