2012 07 03 Kpmg Solvency Ii Beyond Compliance Towards Optimisation

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Solvency II : Beyond compliance towards optimisation

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2012 07 03 Kpmg Solvency Ii Beyond Compliance Towards Optimisation

  1. 1. Solvency II Beyond compliance,towards optimisation www.kpmg.co.uk/solvencyii
  2. 2. 1 | Beyond compliance, towards optimisationApproximately 2 years ago firms embarkedon their Solvency II programmes in earnest-driven by the 1st January 2013 deadline. Givenwhat looked like quite an aggressive timetablemost aimed simply to achieve compliance or“compliance plus” But now, with the benefit of .an additional year (and possibly more), there is alittle breathing space and a chance to explore thepotential benefits and competitive advantagesSolvency II might bring - delivering some realvalue from the £2bn plus the industry hasinvested to date.Based on our experience working with a largenumber of firms on their Solvency II programmeswe have started to consider what the nextsteps might look like for firms looking to buildon their Solvency II investment. Firms that aremost successful at adapting to the challenges ofoperating in a Solvency II environment are morelikely to be commercially successful in thelong term.We call this “Solvency II Optimisation” and belowis an extract from our recent Emerging InsuranceRegulation publication looking at how both theFinance and Risk functions can be “optimised” ,delivering significant improvements in bothperformance and control.Extract from Emerging Insurance Regulation(KPMG publication, February 2012)© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms ,affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  3. 3. Beyond compliance, towards optimisation | 2Solvency IIOptimisation FrameworkMost commentary to date around Solvency II optimisation has focused on the minimisation of capitalrequirements. While this remains a critical area of focus, we see capital optimisation as a much morerelevant goal, taking into account what the leading insurers need to look and act like and what needsto be done to develop from the current state of compliance to become the natural selection for investorsin the future.Two of the key functions at the heart of Solvency II, which could deliver significant changes in overallperformance and control, are Finance and Risk.FinanceFinance processes for insurers, • Disclosures: Under Pillar 3 insurers A single source of data supporting theparticularly in the life sector, have will need to provide granular detail analysis provided by this team, at a levelhistorically been convoluted. There are in all areas of the balance sheet and of granularity that can be mined andlarge volumes of complex policy data P&L attribution that is robust enough presented as required. This data will thensets, processed across multiple systems to bear regulatory scrutiny, including feed an integrated finance, actuarial andand platforms which were typically built to some extent external audit risk system. Key performance indicatorspre-2000. These systems generally (KPIs) will be redefined to focus on the •Timetable: Quantitative Reportinglack flexibility and do not facilitate the metrics that matter most to stakeholders Templates (QRTs) will be requiredprovision of information at the level post Solvency II implementation, within 6 weeks. An annual return willof granularity required by finance to cutting through the raft of new granular be required within 3 months, and thedeliver insightful, decision supporting information being released into the public more sophisticated internal modelmanagement information across the domain as a result of the Solvency and calculations within 6 monthsrequired reporting bases. Typically, Financial Condition Report (SFCR). Theaccounting and actuarial teams have • Data: Data in scope for reporting Board will have greater transparency onoperated in silos, with the accounting must be ‘complete, accurate and key performance drivers against theseteams having little involvement in the appropriate’ and there must be metrics through a suite of relevant,calculation of technical liabilities, and complete traceability from reporting reliable and comprehensive Managementthe actuaries being subject to limited back to underlying data Information (MI). The reporting closechallenge, often as a result leading the process will need to become a moredevelopment of systems and processes. We expect Solvency II to drive the integrated and efficient process to meetMore often than not, new requirements finance focus of market leaders to shift the reporting timetable, supportedhave been met by new ‘workarounds’. away from a model where understanding by new technology and changes in historical numbers, challenging their organisational structure. New technologySolvency II implementation challenges for quality and drawing out implications for will increase automation in the process,finance functions need be set against this the business going forward is the norm provide greater data integrity andbackground. As Solvency II is a regulatory (and takes 90 percent of finance time), reduce, if not eliminate, the time spentrequirement, there is little flexibility in to a model based on a dashboard of reconciling and correcting errors acrossa number of key areas that traditionally performance orientated metrics. This will the different teams.present difficulties to insurers: be supported by a single version of robust data, delivered by a team that invests the Some insurers have attempted to reflect majority of its time in providing insight to this finance ambition to varying degrees inform business critical decisions. in their Solvency II plans, while others are now considering what elements of this To achieve this, we anticipate could be achieved either in the additional organisations will move towards a risk implementation year or in the medium- and finance Centre of Excellence model term. Those able to deliver this valuable – high quality, business-focused finance focus will have a clear information professionals drawn from finance, actuarial advantage over competitors who will be and risk, forming a single, cohesive team left trying to piece together the historical functioning at the core of the business, numbers for reporting purposes. seen as a key driver of value.© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms ,affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  4. 4. 3 | Beyond compliance, towards optimisationRiskIn essence, risk under Solvency II The benefits of a comprehensivefocuses on: risk management framework will be achieved by those who not only fully • Greater quantification and understand the risks facing the business understanding of risk pricing; at present, but also what risks they • Greater understanding of the may face in the future. If business internal management of risks strategy can be matched to capital and their impact on the decision- strategy, and also to the risk profile of making process; and the organisation, this will enable the more accurate prediction of cashflow • Greater transparency of risk variations. Potential issues may then be information. more effectively planned for and, whereFor many, risk is still very much the possible, mitigated.domain of the few in the organisation Where risk management disciplines arewho really understand its nuances and well aligned to business strategy, capitalcomplexities. With risk and capital being planning and product developmentcentral to management’s deliberations, processes, there will be a betteroptimised risk management can understanding of the incremental profitcontribute directly to more intelligent of each product line or business unitrisk-taking and general improvement which will help drive a more completein efficiency and effectiveness. For understanding of the Risk Adjustedinstance, more efficient use of capital and Return on Capital. This will facilitate theeffective capital allocation (or lower capital allocation of available capital towardsrequirements) can result directly from the most strategically important andgreater understanding and quantification profitable products and businesses,of risk. Margins may also benefit from generating a real improvement inenhanced investment and underwriting shareholder value.results, an improved reinsurancestructure and the identification of costcontrol opportunities.A flexible and open risk management‘system’ (RMS – overall risk framework)forms the basis of a leaner risk operatingmodel, reducing duplication of effort andinefficiencies. A flexible and scalablesystem is also more likely to be adaptiveto environmental changes and enablethe organisation to remain ahead ofcompetitors and to represent leadingpractice in the eyes of key stakeholders.Those who can look to the longer termwill drive real competitive advantagethrough the effective embedding of atransparent and persuasive risk culturethroughout the decision-making process.© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent ,member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  5. 5. Beyond compliance, towards optimisation | 4 Optimise Compete • Capital optimisation • Re-evaluate which markets and product lines to • Finance transformation compete in • Risk transformation • Assess core parts of the • Extensive restructuring value chain • Systems transformation • Acquisitions and disposals • Significant cultural change to rebalance the portfolio Comply • Meet Solvency II requirements • Make capital improvements • Implement essential restructuring© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms ,affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  6. 6. 5 | Beyond compliance, towards optimisation© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent ,member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  7. 7. Beyond compliance, towards optimisation | 6 What should you do next? Firms should act now and, using the Solvency II requirements as a platform, seek competitive advantage and optimise efficiency across all areas of the business: • Consider how risk and finance • Improve ability to identify value adding structures can be improved to deliver opportunities through the alignment clear benefits, such as: of risk management with the firms strategic goals and business model; and – higher returns from risk-adjusted capital; • CROs and CFOs should be able to articulate the value that risk – improved capital allocation; and management and finance systems add, – an optimised business mix, not just the protection they offer. The distribution channels, customer benefits are efficiency, effectiveness, segmentation and product embeddedness and enhanced ability to development based on higher quality compete and win. risk and value data; Optimisation is about turning • Look for ways to improve your understanding of risk-adjusted irrecoverable SII costs into returns across lines of business and recurring business benefits. investment alternatives. This will deliver You should invest in achieving superior management information and a clearer view of value drivers optimal outcomes - and we can and destroyers; help you get it right.© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms ,affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  8. 8. Contact us Paul Bishop Michael Crawford Partner Partner T: +44 20 73115151 T: +44 20 73111446 E: paul.bishop@kpmg.co.uk E: michael.crawford@kpmg.co.uk Brid Meaney Nathan Patten Partner Director T: +44 20 73115470 T: +44 20 76942394 E: brid.meaney@kpmg.co.uk E: nathan.patten@kpmg.co.uk 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 endeavour 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. © 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of , independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.www.kpmg.co.uk/solvencyii RR Donnelley | RRD-268781 | April 2012 | Printed on recycled material

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