KPMG's iCircle - The Smart Soirée 2013

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The topic of our event "The Smart Soirée 2013" was "Actuaries of the future - beyond numbers“. This session took place on 14 November 2013 at KPMG, Zurich, and attracted over 90 participants.

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    saved three on my computer today after emailing to myself :)
    may have been compromised on linked in as I am sort of looking after only myself at present.. so this i needed thank you ap
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KPMG's iCircle - The Smart Soirée 2013

  1. 1. KPMG‘s iCircle The Smart Soirée 2013 Actuaries of the future – beyond numbers Auditorium, KPMG AG Zurich, 14 November 2013
  2. 2. Agenda 17:30 Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG Begin of the presentations SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG 19:30 Drinks, food and networking © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 1
  3. 3. Learnings from internal model reviews and future challenges Michael Schmutz The Smart Soirée 2013 14 November 2013 The contents of this presentation represent my own view and do not necessarily correspond to the official view of FINMA.
  4. 4. Decisions Taken – as of the end of August 2013 80.7 % 250 250 Solo entities liable to SST Solo entities and groups liable to SST 80.0 % 200 200 80.0 % 150 150 88.6 % 100 100 Cat. 4 Cat. 5 0 Solo Groups Modules 67.8 % 89.4 % 80 P&C liable to SST 91.7 % 40.0 % 40 70.0 % 100 % 88.9 % 20 20 0 20 61.5 % Cat. 3 Modules 2 Cat. 4 Cat. 5 Decision taken Total 92.3 % 93.1 % 100 % 66.7 % 10 0 Cat. 2 Decision taken Life insurers liable to SST 30 100 % Total 50 40 60 60.9 % Cat. 3 Modules Reinsurers liable to SST 60 Cat. 2 Total Decision taken 100 40 65.2 % 50 0 80 88.9 % 59.0 % 83.7 % 50 0 Cat. 2 Cat. 3 Modules Cat. 4 Cat. 5 Decision taken Total Cat. 2 Cat. 3 Modules Cat. 4 Cat. 5 Decision taken Total
  5. 5. Decisions Taken – as of the end of October 2013 Company view accepted; 6; 9% rejected; 24; 37% conditionally accepted; 35; 54% 3
  6. 6. Some selected (trivial) observations and a related fundamental question The environment / the objects to be modeled are complex and are changing rather rapidly. By making modeling decisions we always pay a price! Fundamental question: Should a model have a clear economical meaning? 100 % 80 % 60 % 40 % 20 % 1y 4y 7y 1y 3y Swap Tenor 4 10y Option Maturity 5y 10y 25y 20y 30y EUR impl. Swaption vol Source: Bloomberg Source: Swiss National Bank
  7. 7. Does consistency matter? Essentially the following and similar slides have been presented several times: 5
  8. 8. Example: Valuation and risk quantification 6
  9. 9. Lessons learned: Tradeoffs in modelling can lead to serious dissents under quants “Too simple” Considerable calibration errors optionalities in the liabilities not captured model working for only a too restricted range of interest rates / volatilities / … “Just right” But right for what? optimization w.r.t. a module vs. w.r.t. the model Extremely difficult / impossible to reach a stable (and honest) calibration “pseudo adequacy” / calibration to noisy data Economic scenario generators as black boxes / not sufficiently transparent “Too complex / not clear enough” 7
  10. 10. Further lessons learned Modeling and quantification of risks is a distinctive area of quantitative specialists but the output is a judicial product. Time constraints: Companies want to be informed as early as possible and decisions should not surprise them. The dynamic of today’s economic environment is reflected in a highly volatile market. It is increasingly questioned whether or not a principle-based and market consistent solvency system is the best approach? (Personal point of view: No reasonable alternatives are known) Increasing political pressure: A major challenge is the creation of an equal playing field in the light of the Solvency II timetable changes. etc. 8
  11. 11. Future challenges • Decision of the company • At the instance of FINMA 1/2 Request to apply an (internal) model Preliminary checks Periodical review of internal models Model change process Validation Challenge 2: Treatment of applications for model variations: only weeks or days after first authorization, or even weeks after the application for using an internal model. 9 Decision Challenge 1: Find a good balance concerning the tradeoffs between scientific correctness vs. pragmatism vs. juridical feasibility.
  12. 12. Modelling challenges 2/2 Long-term interest rates (there is some work in progress, e.g. by El Karoui, Mard, Hillairet) Applicable and stable calibration methods (suitable regularization of ill-posed problems, better understanding of model-independent arbitrage opportunities / active areas of research in math. finance) Efficient and sufficiently accurate valuation methods after one year. Suitable valuation of non-liquidly traded assets and liabilities (theory of “two prices”, sublinear pricing rules etc. / very hot areas of current research) etc. 10
  13. 13. What we should avoid: To go back… 11
  14. 14. Eidgenössische Finanzmarktaufsicht FINMA Einsteinstrasse 2 CH-3003 Bern michael.schmutz@finma.ch www.finma.ch 12
  15. 15. Agenda 17:30 Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG Begin of the presentations SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG 19:30 Drinks, food and networking © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 14
  16. 16. IFRS 4 Phase II 14 November 2013 Thomas Schneider, KPMG AG
  17. 17. Agenda Overview ■ A brief history of time ■ Key objectives Building Block Approach ■ Building blocks 1 - 4 ■ Examples ■ Presentation Summary, Comparison and Impact ■ Focus areas ED ■ Comparison with Solvency II ■ Expected Impacts and Practical Implications © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 16
  18. 18. Overview
  19. 19. A brief history of time (1/2) 1997 ■ Initiation of IFRS 4, phase I with the idea to implement a common global insurance accounting framework. 2001 ■ The IASB (International Accounting Standards Board) was constituted and took over the project. 2004 ■ The IASB introduced IFRS 4 Insurance Contracts, phase I, an interim standard that represented the first phase of the insurance project. ■ Sought to minimise the amount of change required to current accounting practices (to avoid changes that might be reversed). 2007 ■ The second phase of the insurance project was launched. 2010 ■ Exposure Draft published. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 18
  20. 20. A brief history of time (2/2) 20 June 2013: Re-exposure draft published. 25 October 2013: Comment period ended. today 1 January 2017 Earliest possible effective date. (IASB states it expects 1 Jan 2017 as earliest possible mandatory effective date) It will take at least 20 years from the launch of the project until implementation! 31 December 2017 Earliest annual period in which proposals could apply. (Restatement of comparatives required, i.e. opening balance sheet 1 Jan 2017) © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 19
  21. 21. Key objectives The key objectives of the IFRS 4 proposals are to: 1. Improve the transparency of the effects of insurance contracts on an entity’s financial position and performance. 2. Reduce diversity in the accounting treatments of insurance contracts. 3. Ensure that the entity measures insurance contracts using a current value approach that incorporates all of the available information in a way that is consistent with observable market information. 4. Ensure that the approach to measuring insurance contracts provides information that is relevant to the users the financial statements. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 20
  22. 22. Building Block Approach
  23. 23. Overview The measurement model – Building Block Approach (BBA) Explicit, unbiased and probability-weighted current estimates of future cash flows. 1. Discounted at current rates to reflect the time value of money. 2. Risk adjustment to adjust for the effects of uncertainty about the amount and timing of future cash flows. 3. 4. Contractual Service Margin (formerly called Residual Margin). To remove any profit at inception. Released over coverage period. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 22
  24. 24. Proposed measurement models Fundamentals Level of measurement An insurer would measure the present value of the fulfilment cash flows excluding the risk adjustment at the portfolio level of aggregation for insurance contracts. No level of measurement prescribed for the risk adjustment. Portfolio Margins Contracts that are subject to similar risks and priced similarly relative to the risk taken on and managed together as a single pool. Unit of account used to determine the contractual service margin should be at portfolio level. Unit of account used to release not prescribed but consistent with the objective of release. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 23
  25. 25. Proposed measurement models Building block 1 – Cash flows Estimates of cash flows would include all cash inflows and outflows related directly to the fulfilment of the portfolio of contracts. These would: ■ be explicit (i.e. separate from estimates of discount rates that adjust for the time value of money and the risk adjustment) ■ incorporate, in an unbiased way, all available information that relates to the cash flows of the contract ■ include only cash flows arising from existing contracts within the contracts’ boundaries. Acquisition costs to be included should be all the direct costs that the insurer will incur in acquiring the contracts in the portfolio. Estimates of cash flows would be updated each reporting period and measured at a portfolio level. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 24
  26. 26. Proposed measurement models Building block 2 – Time value of money Example bottom-up and top-down approach Financial instrument yield of 5.25% (based on actual assets held or a reference portfolio) Either a top-down or a bottom-up approach may be used to determine an appropriate discount rate. ■ In theory, both approaches should result in the same discount rate, however in practice, differences are expected. ■ The top-down approach may result in a higher rate, as illustrated. Market risk premium expected losses (1%) Top-down approach: 3.75% Market risk premium for unexpected losses (.5%) Difference between top-down and bottom up approach (.25%) Liquidity premium (.5%) Bottom-up approach: 3.50% Risk-free rate 3% ■ No specific method prescribed. ■ Regardless of the approach used, the discount rate should be consistent with the characteristics of the insurance contract liability, e.g. timing, currency and liquidity. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 25
  27. 27. Proposed measurement models Building block 2 – Use of OCI to present changes in discount rates Present in OCI Cumulative OCI Present in profit or loss Interest expense at ‘locked-in’ rate Difference between liability discounted at the current rate and the liability discounted at the (locked-in) rate at inception Current period OCI Equals interest expense at current rate less interest expense at ‘locked-in’ rate Changes in interest sensitive cash flow assumptions (e.g. minimum interest guarantees)* * Unless offset against an unlocked contractual service margin Key attributes ■ The use of OCI to present the effect of discount rate changes would be required (rather than permitted) ■ To recognise the effect of changes in cash flow assumptions in profit or loss using the ‘locked-in’ rate © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26
  28. 28. Proposed measurement models Building block 3 – Risk adjustment Risk Adjustment: “The compensation the insurer requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract.” ■ The measurement of an insurance contract should contain an explicit risk adjustment. ■ IASB has not prescribed a unit of account for measurement of the risk adjustment. ■ The IASB would not limit the range of available techniques and related inputs to the risk adjustment. ■ Re-measured each reporting period and changes are recognised in profit or loss. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 27
  29. 29. Proposed measurement models Building block 3 – Risk adjustment © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 28
  30. 30. Proposed measurement models Building block 4 – Contractual service margin Contractual Service Margin ■ Represents the unearned profit and is a “shock absorber” ■ Removes day-one gains: Arises when the present value of the fulfilment cash flows is less than zero* ■ If the present value of fulfilment cash flows is positive, recognise a loss in profit or loss at inception ■ Prospectively adjusted for changes in the estimates of cash flows relating to future coverage or other future services; cannot become negative in subsequent measurement (unlocking) ■ Systematic release over coverage period based on the pattern of transfer of services provided ■ Interest accretion using discount rate at inception (i.e. the ‘locked-in’ rate from inception) ■ Classified as part of the insurance liability * defined as the expected present value of the future cash outflows less cash inflows plus risk adjustment © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 29
  31. 31. Proposed measurement models Example 1 – Contractual margin approach (IASB model) An entity issues insurance contracts that form a single portfolio and coverage begins when contracts are issued. The impacts at initial recognition, and on payment of the first premium and incremental acquisition costs would be as follows: © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 30
  32. 32. Proposed measurement models Example 2 What happens if the actual cash flows are different to the expected cash flows? © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 31
  33. 33. Proposed measurement models Example 2 (1/3) © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 32
  34. 34. Proposed measurement models Example 2 – Analysis (2/3) Fact: Claims incurred in Year 2 are different from the expected claims, and actual cash outflows for that year equal 150. Analysis: At the end of Year 2, the entity revises the estimated cash flows for Year 3. As a result, the expected cash flows are as follows: Yr 1 Expected cash outflows at initial recognition Yr 2 Yr 3 200 200 200 150 150 Revised actual/estimated cash outflows estimated at the end of Year 2 and Year 3 The changes in estimates of cash flows at the end of Year 2 would be accounted for as follows: ■ the decrease of 50 in the expected future cash flows for Year 3 would increase the contractual service margin; and ■ the decrease of 50 between actual cash flows for Year 2 and previous estimates – i.e. the experience adjustment – would be recognised in profit or loss of Year 2 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 33
  35. 35. Proposed measurement models Example 2 – Contractual Service Margin (3/3) The reconciliation of the contractual service margin would be as follows: Initial recognition Yr 1 Yr 2 Yr 3 300 200 150 (100) (100) (150) - 50 - 200 150 - Yr 1 Yr 2 Yr 3 350 100 100 150 50 - 50 - 450 100 150 150 Opening balance Recognised in profit or loss Decrease in estimate of future cash flows added to margin Closing balance 300 The net amounts recognised in profit or loss would be as follows: Total Change in contractual service margin reflecting the transfer of services Experience adjustments Profit/ (loss) © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 34
  36. 36. Proposed measurement models Presentation of the statement of profit or loss and OCI Initial recognition: Building block 1 Building block 2 Building block 3 Building block 4 zero Contractual service margin Expected cash inflows Discounting Expected cash outflows Risk adjustment Recognised in profit or loss if no contractual service margin Presentation of changes in profit or loss and OCI: Changes in cash flows unrelated to services: profit or loss Unwind of locked-in discount rate: profit or loss Changes in cash flows related to past and current services: profit or loss Changes in discount rate: OCI Changes in risk adjustment: profit or loss Release of margin: profit or loss Offset changes related to future services Changes in cash flows related to future services: Offset against the margin * (*) Recognised in profit or loss if no contractual service margin © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 35
  37. 37. Summary, Comparison & Impact
  38. 38. Content of the new ED at a glance Key Changes to 2010 proposals Areas with significant changes ■ Scope – financial guarantees ■ Separating components of an insurance contract ■ Recognition Areas with significant clarifications ■ Level of measurement ■ Costs included in measurement ■ Contract boundaries ■ Discount rate ■ Acquisition costs ■ Risk adjustment ■ Contractual service margin ■ Participating contracts – the “mirroring” exception ■ Disclosures ■ Simplified premium-allocation approach (PAA) ■ Reinsurance ■ Presentation of the statement of profit or loss and OCI ■ Effective date and transition © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 37
  39. 39. Comparing the proposal with Solvency II IFRS Phase II versus Solvency II Liabilities Assets IFRS 4 phase II Solvency II Surplus Equity SCR MCR CSM Risk margin Market value of assets Risk margin Expected present value of future cash flows © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Market consistent value for hedgeable risks Best estimate for nonhedgeable risks 38
  40. 40. Comparing the proposal with Solvency II Anticipated Variance Objectives Scope Coverage Discount rate Diversification Risk adjustment (IFRS) & Risk margin (Solvency II) CSM Cash flows Contract boundary Acquisition costs Other expenses Key Expected to be significantly different Expected to reasonably different Differences expected to be immaterial or non-existent © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 39
  41. 41. How will the proposals affect the industry? Operational performance People and processes Data and systems Product design and pricing and asset- liability management Possible volatility in equity and profit or loss Capital management © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 40
  42. 42. Where are firms in their thinking? Whilst firms are aware of the changes, very few firms surveyed have started to understand the project management, numerical and systems implications of the proposals 80% 71% 70% 60% 50% 40% 30% 20% 20% 10% 6% 3% 0% 0% Haven't given this any consideration Aware of changes but not started to consider the implications Started to think through project management implications Started to think Started to think through through numerical impacts systems implications Source: KPMG Technical Practices Survey 2013 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 41
  43. 43. Feedback from the industry  Unlocking  Subsequent measurement for favourable changes  Level of measurement Contractual Service Margin (CSM)  Acquisition costs  Mirroring  “Confidence level” disclosure Clarity of proposals Discount rates  Determination of discount rate  Changes recognised in OCI Hot Topics Interaction with IFRS 9 Presentation  Alignment of effective dates  Redesignation of financial assets Feedback :  Loss of volume information for key metrics  Investment components excluded from revenue     Very complex High administrative efforts Accounting mismatches remain Does it really reflect the business? © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 42
  44. 44. Questions?
  45. 45. Agenda 17:30 Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG Begin of the presentations SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG 19:30 Drinks, food and networking © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 44
  46. 46. Big data and predictive models – More than just buzz words 14 November 2013 William Southwell, KPMG AG
  47. 47. America‘s Cup 1850 © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 2013 46
  48. 48. So what‘s this all about? Uses Predictive Models Big Data © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 47
  49. 49. Big Data Volume Variety Velocity © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 48
  50. 50. Predictive Models Classification and regression trees CHAID Analysis Generalised regression models Time series/ forecasting High Distribution Analysis Cluster Analysis Bootstrap Complexity Prediction what might happen? Power analysis Monitoring what’s happening now? Analysis why did it happen? Management Information Predictive models Linear regression Dashboards, Scorecards, KPIs Anova OLAP and visualization tools Drill down Reporting what happened? Query, reporting, & search tools SEPATH Low Business Value Generalised linear models (GLM) Text mining High Machine Learning/ Neural Networks © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 49
  51. 51. Drivers Product Focus Underwriting Features Product research T&Cs Costs Users Predictive Models Big Data Consumer Focus Sales Marketing 360º view of customer Engagement Interactions © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 50
  52. 52. Use in Insurance Management Underwriting ■ Risk Selection ■ Pricing ■ Telematics ■ Mortality ■ Price elasticity ■ Price optimisation Marketing ■ Customer Segmentation ■ Lapse/ Conversion ■ Lifetime value ■ Cross-sell/ Up-sell ■ Prospect identification ■ Website optimisation ■ Campaign selection ■ Social Media ■ Sentiment analysis Claims Management ■ Fraud prevention ■ Faster claims processing ■ Claim classification ■ Strategic Decision Making Distribution ■ Talent identification ■ Resignation risk ■ Candidate selection HR ■ Performance measurement ■ Channel optimisation ■ Agent renumeration Actuarial/Risk Management ■ Reserving ■ Audit ■ Risk identification ■ Compliance BIG DATA © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 51
  53. 53. Underwriting Case Study (1/5): Personal Lines Premium Rating PRODUCT FOCUS CUSTOMER FOCUS Conversion model Expense Model Loadings Female Probability of conversion Claims Model 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Male 1.8 1.9 2 Ratio of quote to market quote Risk Premium Discounts Final Premium Probability of renewal Retention model 0.7 0.8 0.9 Tenure= 1st renewal © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 1 1.1 1.2 Price change 1.3 Tenure = 2nd renewal 1.4 1.5 1.6 Tenure = 3rd renewal 52
  54. 54. Underwriting Case Study (2/5): Mortality/ Underwritten Life Impaired life Age Type of retirement Sex Occupation Birth Year Qx = Mortality Marital Status Smoker? Annuity Size Demographics Post Code © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 53
  55. 55. Underwriting Case Study (3/5): Telematics Consumer ■ Lower premiums ■ Only pay for what use ■ Value added services: – Emergency call out – Parking assistance – Stolen vehicle recovery – Vehicle diagnostics – Location services e.g. nearest petrol station Insurer ■ Attract favorable risks ■ Pricing Accuracy – Road safety information – Traffic information – Driving feedback ■ Fight fraudulent claims ■ Reduce claim costs ■ Lower premiums ■ Differentiate brand ■ More engaged customers ■ Reduce theft ■ Environmentally Friendly promotion © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 54
  56. 56. Marketing Case Study (4/5): Direct Marketing © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 55
  57. 57. Claims Management Case Study (5/5): Fraud Detection Claims Data Telematics Data Policy Data Social Media Data © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 56
  58. 58. Tackling Big Data and Predictive Models Communicate what’s possible to management Underwriting HR Marketing Identify business challenges which can be addressed with Predictive Models Big Data Management Claims Risk Management Identify data which needs to be collected and develop required technology Build models and embed into processes © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 57
  59. 59. Who does all this? ACTUARY: Making Financial Sense of the future © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 58
  60. 60. Summary © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 59
  61. 61. Agenda 17:30 Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG Begin of the presentations SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG 19:30 Drinks, food and networking © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 60
  62. 62. Contact details Hieronymus T. Dormann Partner Sector Head Insurance KPMG AG Badenerstrasse 172 8026 Zurich Phone Mobile +41 58 249 35 03 +41 79 438 30 03 wsouthwell@kpmg.com
  63. 63. Contact details IFRS 4 Phase II Patricia Bielmann Partner IFRS Financial Services KPMG AG Badenerstrasse 172 8026 Zurich Phone Fax Thomas Schneider Partner Head Quantitative Finance Group KPMG AG Badenerstrasse 172 8026 Zurich +41 58 249 41 88 +41 58 249 48 64 pbielmann@kpmg.com Phone +41 58 249 54 50 Mobile +41 79 785 31 57 thomasschneider@kpmg.com
  64. 64. Contact details Big data and predictive models William Southwell Senior Manager Head Non-life Actuarial Services KPMG AG Badenerstrasse 172 8026 Zurich Phone Mobile +41 58 249 62 94 +41 79 176 90 96 wsouthwell@kpmg.com
  65. 65. Disclaimer: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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