Solvency II was implemented from January 1, 2016 and EU insurers now face new regulations. They are now required to hold capital against underwriting, credit, liquidity, market and operational risks. They have to take a proactive, future-looking approach to risks, and are subject to closer supervision and disclosure requirements. While the impact of these provisions is felt across the insurance value chain, the brunt is being borne by the asset management, risk management and actuarial functions more. Managing risks optimally is the key driver for generating higher shareholder value in insurance. During 2011 to 2015, insurers in the ‘optimal risk return’ category witnessed an improvement of 92.9% in their share price compared to only 30% change in the case of insurers in the ‘partially optimal/sub-optimal’ categories. To reduce the adverse impact of Solvency II, insurers must optimize their risk by: - Creating robust risk assessment frameworks - Handling risks optimally - Optimizing operations to reduce costs The adoption of digital technologies and advanced analytics is essential to all three of these strategies. For instance, analytics can be woven into risk assessment frameworks and be used to price premiums based on the risks. It can be leveraged to understand which market investments are risky and should be scaled back. Big data analytics, on the other hand, can prevent potential fraud and lower underwriting risks. Digital channels can thus help streamline operations and reduce inefficiencies arising from unnecessary complexity. To learn more about Solvency II, its impact and strategies to deal with it, read the full report at http://www.wnsdecisionpoint.com/our-insights/reports/detail/51/managing-growth-in-a-stringent-regulatory-environment

1. Wnsdecisionpoint.com
MANAGING GROWTH IN A STRINGENT
REGULATORY ENVIRONMENT:
SOLVENCY II AND WHAT IT MEANS FOR EU INSURERS

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 Two thresholds:
– Solvency Capital Requirement (SCR)
– Minimum Capital Requirement (MCR)
 SCR is calculated using either a standard formula
or, with regulatory approval, an Internal Model
 MCR is calculated as a linear function of specified
variables: cannot fall below 25 percent, or exceed
45 percent of an insurer's SCR
 Harmonized standards for the valuation of assets
and liabilities
 Effective Risk Management System
 Own Risk and Solvency Assessment
(ORSA)
 Supervisory Review and Intervention
 Insurers are required to publish details of
the risks, capital adequacy and risk
management practices
 Transparency and open information
regarding capital requirements and risk
exposures are intended to assist market
forces in imposing greater discipline in
the industry
Solvency II was implemented on 1st January 2016
The regulation is divided into 3 areas also called pillars
Following are key changes compared to the previous standard i.e. Solvency I
Pillar 1 – Financial
Requirements
Pillar 2 – Governance
and Supervision
Pillar 3 – Reporting
and Disclosure
Establish functions, or specific areas
of responsibility and expertise, to deal
with risk management, risk modelling
(for internal model users), compliance,
internal audit and actuarial issues
Supervisory Review
Process (SRP) - Better
and earlier identification
of insurers, which might
be heading for difficulties
Own Risk and Solvency
Assessment (ORSA) -
Likely future
developments to be
considered
Introduction of
economic risk-based
solvency requirements
Capital requirements
need to be maintained
over and above the
technical provisions
Source: Lloyd’s
Source: European Commission

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Asset
Management
 Usage of analytics
 Reduction in asset liability duration mismatch
 Stronger collaboration with other
departments
Product
Development
 Risk appropriate pricing
 Product profitability analysis
 Usage of analytics
Sales and
Distribution
 Stronger underwriting principles
 Usage of analytics
 Stronger collaboration with other
departments
IT and
Operations
 Stronger collaboration with other
departments
 Streamlining of IT and operational systems
 Investments in new tools and technologies
The directive has impacted the entire insurance value chain in the EU
and primarily risk management function
Impact of Solvency II is varied across functions
0% 25% 50% 75% 100%
Product Development
Asset Management
Sales and Distribution
IT
Finance
Risk Management
Actuarial
Impact of Solvency II
Very High Impact High Impact Medium Impact
Low Impact Very Low Impact
Source: Based on interviews with 23 senior executives from leading European insurers
Insurers are leveraging insights from analytics in response to
Solvency II
Top three focus areas of insurers for below functions
SupportFunctionsCoreFunctions
Source: Based on interviews with 23 senior executives from leading European insurers
Read the full report to know more about the Solvency II’s impact and resultant insurers’ response

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 Cutting down risks (underwriting and market related) may
yield higher shareholder returns in case of P&C business but
could pare share price gains in case of life and health
insurance*
 In the case of life and health insurance, companies need to
maintain optimal level of risks i.e. neither high nor low, to
outperform peers*
– Deciding on the optimal level of insurance and market
risks in the case of life insurance business can be tricky
– Drafting growth strategies according to the market
attractiveness and intensity of competition in a particular
geography where the insurer operates can help optimize
risks
– Companies should also consider their own capabilities
while chalking out their growth strategies
Insurers should manage risks prudently to ensure sustainable growth
Different risk management requirements are needed for
property and casualty and life & health businesses to garner
higher shareholder value
Following three approaches can help companies achieve
the objective of managing risks prudently
*WNS DecisionPoint™ Study
Carefully manage all risks with robust risk
assessment frameworks to make suitable
adjustments
Handle risks optimally to achieve higher returns with
minimum capital requirements
Optimize operations and leverage digital
technologies to reduce costs and offset potential
losses from various risks
Read the full report to know more about the study
Read the full report to know more about the recommendations to
manage risks prudently

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Risk culture of the insurers need to be transformed
Risk Management Maturity Framework
Non-existent
 Insurer has
not
recognized
the need for
risk
management
function
 Risks are not
directly
identified,
managed and
monitored
 Risk
management
processes
have not been
developed
 Reliance on
individual
efforts to
identify,
manage and
monitor risks
 Risk
management
processes
have been
implemented,
but they are
not consistent
and effective
 Certain risks
are defined
and managed
in silos
 Risk
management
is in place,
and is
designed and
operated in a
timely and
consistent
manner
 Actions are
taken to
address high
priority risks
 Advanced risk
management
capabilities,
strong
collaboration
and
coordination
across
business units
 Processes are
actively
utilized
 Leading-edge
risk
management
capabilities
are present
 Risk
management
is embedded
in strategic
capital
allocation
decisions
Ad hoc Initial Repeatable Managed Leadership
Source: WNS DecisionPoint™ Interview
Risk management now plays a pivotal role in
board meetings and strategic decisions
Successful insurance organizations distinguish
themselves from competition by attaining
highest risk management maturity i.e.
leadership stage
Managing risks prudently will require business
transformation including a robust change
management program with strong leadership
commitment
Companies need to infuse analytics within
decision making processes to manage and
monitor risk, and assess capital requirements

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