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Managing growth in stringent regulatory environment_Solvency II and What it Means for EU Insurers

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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

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Managing growth in stringent regulatory environment_Solvency II and What it Means for EU Insurers

  1. 1. Wnsdecisionpoint.com MANAGING GROWTH IN A STRINGENT  REGULATORY ENVIRONMENT: SOLVENCY II AND WHAT IT MEANS FOR EU INSURERS
  2. 2. 11 Wnsdecisionpoint.com  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
  3. 3. 22 Wnsdecisionpoint.com 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
  4. 4. 33 Wnsdecisionpoint.com  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
  5. 5. 44 Wnsdecisionpoint.com 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
  6. 6. 55 Wnsdecisionpoint.com A credible insights hub for companies looking to transform their strategies and operations by aligning with todays realities and tomorrow’s disruptions. Email: perspectives@wnsdecisionpoint.com Website: wnsdecisionpoint.com @WNSDecisionPt WNS DecisionPoint WNS DecisionPoint

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