FINANCIAL SERVICES          Insurance           Finance  Transformation:     The business case for change                M...
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services andis a Swiss...
CoNTENTS                                                            INTRoDuCTIoN & ExECuTIvE SuMMARy                      ...
Introduction& ExecutivesummaryPAuL BISHoPLead Partner for InsuranceFinance Transformation30                               ...
…spending substantial sums of money to address                                                              these risks wh...
BACkGRouND:1870 to 2002 “How didwe get in this mess?”                                                             Most peo...
…it is only really with the financial crisis of 2001/2002                                                            and t...
THE DRIvERS FoR CHANGE:2002 to 2012 “Why is financesuddenly so important?”All the factors raised in the previous          ...
…many insurers have had their capital eroded by                                                            increased solve...
ISSuES:“What are the problems we have to solve?”                                 So from a Financial Reporting and        ...
SySTEMS AND DATAAt a high level, every life company has the same data flow from underlying records through to reports.In F...
SySTEMS AND DATAContinued...Figure 5: Summary of key issues with insurers’ systems architecture               Systems     ...
Each incremental change… has been covered by                                                            complex, ingenious...
PEoPLE                                                           Developing, operating and managing all                   ...
Complexity of systems, the proliferation of EUCs, the                                                            extent of...
REPoRTING PRoCESS                                                                                                         ...
…CFOs are asking how will they reduce the process                                                            from twelve t...
CoNCLuSIoN:The business case “Why shouldwe make this investment?”case                                                     ...
Key to the business case approval will be ensuring the Board                                                            ar...
Contact usPaul Bishop                                                         Andrew LyonInsurance Finance                ...
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2012 05 03 Kpmg Insurance Finance Transformation The Business Case For Change Accessible

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2012 05 03 Kpmg Insurance Finance Transformation The Business Case For Change Accessible

  1. 1. FINANCIAL SERVICES Insurance Finance Transformation: The business case for change March 2012www.kpmg.co.uk/insurance financetransformation
  2. 2. © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services andis a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  3. 3. CoNTENTS INTRoDuCTIoN & ExECuTIvE SuMMARy 1 BACkGRouND 1870 to 2002 “How did we get in this mess?” 3 THE DRIvERS FoR CHANGE 2002 to 2012 “Why is finance suddenly so important?” 5 ISSuES “What are the problems we have to solve?” 7 SySTEMS AND DATA 8 PEoPLE 11 REPoRTING PRoCESS 13 CoNCLuSIoN The business case “Why should we make this investment?” 15© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services andis a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  4. 4. Introduction& ExecutivesummaryPAuL BISHoPLead Partner for InsuranceFinance Transformation30 For decades, life insurers have However, the business case for this the potential to reduce underinvested in Finance and have change has always been difficult. The Finance operational ‘coped’ with a steady increase in challenges to Finance have built slowly costs by up to 30 Percent internal and external reporting, and over time, and superficially they have with new products and new structures, been met – Financial Statements andPercent all with short term solutions. Most Regulatory Returns have been produced have now reached the stage where on time with clean Audit reports, Boards incremental change will not work and the and Management have reviewed and fundamental underlying issues around discussed monthly and quarterly packs. data, systems, models, processes and There are operational cost benefits from people have to be addressed. change, but it is often hard to justify the investment in these terms alone. OnOver the last five years, the Finance CFOs and finance leadership are the other hand, it is difficult to be directfunctions of almost every major UK life generally well aware of this. They know with a Board where the real issue is theinsurance company have been going only too well, that the legacy finance fragility of some of the key numbers andthrough significant change with a level systems for insurers are horrendously the focus is sustainable speed and qualityof investment never seen before. The complicated, slow and high risk to of reporting. Solvency II has helpedcurrent phase is dominated by Solvency change. These systems typically by providing a regulatory mandate toII which has crystallised a number of long consist of multiple platforms, a range address many of the underlying issues,standing issues and challenges in these of inconsistent data sources, link and many life insurers have used this asfinance functions. These can no longer into complex valuation calculation an opportunity to improve models andbe ignored as regulators, markets, rating engines and are surrounded by an systems in particular, but there is stillagencies and other key stakeholders intricate web of spreadsheets. The a lot to be done.increase the pressure for faster, more inefficiency and inflexibility from thisreliable and a significantly greater volume systems architecture and relatedof financial information than ever before. processes are further compoundedAt the same time there is the constant by organisational issues, where silopressure on CFOs to reduce operational behaviours and lack of communicationcosts and investment budgets have been result in a high level of dependencyscarce for support functions. on key individuals and breakdowns in communication. All this has to change.1 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  5. 5. …spending substantial sums of money to address these risks when they crystallise, but this is arguably too little too lateIn our experience, critical to an effective From our experience with a number of This article explores the issues raised,Business case is a full analysis of the clients we know there are some clear and concludes with our view as to howrisks inherent in current systems and financial benefits, with the potential to to frame the case for change. We willprocesses and in particular the risks and reduce Finance operational costs by up be producing a series of best practicecosts inherent to not changing them. to 30% and to reduce significantly, capital papers, which focus in more detail onBoards and senior management are reserves, through reduced operational some of the more challenging areasgenerally protected from the ‘warts and risk. But arguably the biggest benefit is and emerging solutions.all’ view of Finance and need to be shown mitigating the risk associated with poor I hope you find this article boththe risks they are running – which are financial information both internally and interesting and relevant.generally consistent across the industry. externally. Companies typically end up spending substantial sums of money toIn most cases, there is a compelling address these risks when they crystalliseBusiness case, however the key is ensuring but this is arguably too little too late asthe Executive Board are clear on the impact the damage is already done.of not making the right investment froma commercial and operational view.Figure 1: Summary of issues and risks in insurance finance functions Issues Risks Benefits of change • Most life insurers have significant issues managing/ • Inefficient/slow controlling data, especially policy data from legacy data processing, • Operational efficiency – systems increasing costs and estimated value of delaying reporting 20-30% savings in finance • Regulators (Solvency II) require traceability and Data and increasing risks transparency from reports to underlying data of error • Markets/Boards require drill down to support detailed Data & Systems analytics to tight timetables with a high degree of • Capital & Cash – 50% • Regulatory censure of explicit & implied accuracy/reliability for non-compliance reserves, 10% of operational risk capital • Many life insurers have multiple models, never designed • Prudential capital to support current reporting requirements in terms of: required to reflect Model risk of errors – speed of reporting architecture • Reduced cost of future – detailed outputs • Inability to provide change – 25% of overall – transparency and controls over inputs and processing robust explanations finance change budget leads to loss of Surrounding internal and external • Large number of End user computing (EUCs) credibility technology • Improved speed and • Inflexible systems quality of reporting – • Silo mentality particularly between accountants and unable to respond value 5% of market actuaries with a lack of accountability/ understanding People to change capitalisation of overall results • Key man dependencies • Business decisions based on late, poor quality, inadequate • Improved business Reporting • Close process driven by system constraints/ financial information decision support – value speed organisational design is slow and liable to error determined by businessSource: KPMG LLP (UK) 2012© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 2is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  6. 6. BACkGRouND:1870 to 2002 “How didwe get in this mess?” Most people do not realise that external • Any quantification of long term …external reporting requirements for the reporting requirements for the life policyholder liabilities, instead including life insurance industry insurance industry did not change the amount of the life fund did not change significantly for over 100 years. Between significantly for over • Any significant disclosures – a typical 1870 and the early 1990s, the Financial set of financial statements was around Statements of a UK life insurer were very 10 pages limited, reported relatively late, and did not provide any of the following: • Any useful profit and loss information, instead providing a life fund statement of accrual adjusted cash flows and a transfer to profit and lossFigure 2: Extract from 1870 Life Insurance Companies Act and Hambro Life Assurance plc 1981 Annual Accounts Set out below are the Revenue accounts formats from the 1870 Life Insurance Companies Act and Hambro Life’s 1981 Financial Statements. As you can see after 110 years later not much has changed. Hambro Life was a FTSE 100 company at that time, and its Financial Statements were only 11 pages long – the Financial Statements of a typical FTSE 100 life insurer today would be 180 pages and counting. Revenue schedule as set out by Life Assurance Companies Act 1870 Hambro Life Assurance Company Annual Accounts 1981 Source: Life Assurane Companies Act 1870 Source: Companies House archivesSource: KPMG LLP (UK) 20123 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  7. 7. …it is only really with the financial crisis of 2001/2002 and the capital exposures it identified, …that the position really changed There were regulatory reports, such as In late 1994, Modified Statutory was the DT1 returns, which provided more introduced into Life insurance financial information, including details of liabilities, reporting. Embedded value reporting but disclosure was very limited and had already been introduced by the banks the deadline was six months. Limited in the 1980s, and now found its way companies were essentially valued on into Life Company reporting during the dividend flows. There was a significant ‘90s. This increased the detail required reliance on the Appointed Actuary to for statutory reporting, but did not really manage capital, which for most major fundamentally change things. companies was not seen as an issue It was only really in the new millennium as there were significant surpluses with the financial crisis of 2001/2002 and in any case with profit benefits and the capital exposures it identified, in particular were regarded as highly the Equitable case and its impact on flexible. Strategically and operationally, managing with profits, the introduction Life companies were very focused on of IFRS and the codification of embedded sales, and most management reporting value into EEV that the position really was around sales volumes and related changed, both internally and externally. activity and expenses.© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 4is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  8. 8. THE DRIvERS FoR CHANGE:2002 to 2012 “Why is financesuddenly so important?”All the factors raised in the previous Market Consistent Embedded some cases, poor business decisions.section resulted in a period of intense Value and Solvency II is due for With capital scarce and profitabilitychange from 2002 to the current day implementation and IFRS Phase II under pressure, management andand this level of change looks set to is not too far away. Boards need more relevant, regularcontinue for the foreseeable future. and timely financial information, • Business needs. Insurance marketsThese changes have been driven by around actual and planned product have become increasingly open anda number of factors, namely: and channel profitability and capital price competitive during this period requirements.• Regulation. European Embedded and at the same time many insurers Value and major changes to solvency have had their capital eroded by • The market place. External requirements in the UK are already in increased solvency requirements, stakeholders, principally analysts place. The next phase which includes adverse investment markets and in and rating agencies, are also lookingFigure 3: Summary of some of the key Solvency II requirements Solvency II requirements Issues • Detail in key areas that is robust enough to bear • Previously unused to such scrutiny, numbers regulatory scrutiny, possibly external audit have generally contained significant estimates Disclosures • Detailed analysis of assets and liabilities, and related and approximations Pillar 3 capital requirements, plus profit and loss attribution • The data in the Quantitative Reporting Template (QRTs) • Insurers finance systems are complex, require must be “complete, accurate and appropriate” and a number of reconciliation and controls and do not there must be complete traceability from the QRTs easily support traceability of data Data back to the underlying data • Increased requirements for granularity of data • Demanding requirements as regards documentation • Limited documentation exists and requires remediation of models, processes, policies and systems • Amending and documenting old systems will be Documentation expensive and has limited value going forward • Quantative Reporting Templates (QRTs) will be required • Currently FSA Returns are required within three within six weeks months, and more complex ICA calculations within six months Timetable • Producing and validating figures for submission to regulators in shortened timescales is a very real challengeSource: KPMG LLP (UK) 20125 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  9. 9. …many insurers have had their capital eroded by increased solvency requirements, adverse investment markets and in some cases poor business decisions Management and Boards need more relevant, regular and timely financial information, around actual and planned product and channel profitability and capital requirements for more robust, more detailed and and have dealt with recent change It discusses how companies need to more consistent information about the by adapting and extending historic optimise business performance to ensure performance of insurers. The market capability. This has led to a labour they remain competitive in the post- has clearly penalised the life sector in intensive process and a high cost Solvency II world. particular for its perceived lack of base for finance which will need to The Solvency II requirements mean that transparency. The increased focus also be addressed. Cost reduction is at the cost of minimal compliance is high – reflects the change of ownership in the the forefront for many CEOs. amending and documenting old systems industry and in capital structures, with Specifically in terms of Solvency II is expensive – and the incremental cost significantly greater use of debt and requirements, there is little or no flexibility of strategic solutions that much less. So, other non-equity capital, the effective in a number of key areas which present for many CFOs, Solvency II represents a demise of mutuals and the decreasing particular difficulties to life insurers, as once in a lifetime opportunity to address prominence of 90:10 funds. Moreover, summarised in Figure 3. the fundamental issues – a view KPMG analysts are not just concerned about share – which partly explains the current actual results, they also want reliable Further information on Solvency II level of major change programmes. forecasts and plans. requirements can be found on our KPMG website1, including a recent article on• value. There is also increasing Solvency Optimisation in the Business2 pressure on finance to add value, both which talks about insurance management in terms of meeting needs, but also in historically being focused on value terms of efficiency. Many insurers 1 www.kpmg.co.uk/solvencyii protection and reducing losses and not have underinvested in finance 2 Extract from: ‘Evolving Insurance Regulation: forward looking and value creating. Time to get ahead’, KPMG International, February 2012 systems, processes and people,© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 6is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  10. 10. ISSuES:“What are the problems we have to solve?” So from a Financial Reporting and and customer service, to the extent thatFinancial reporting has Management perspective, the life in many companies major changes aroundlong been the poor relative insurance industry was stable for over products, corporate and fund structures 100 years, and then 10 years ago started and acquisition integration have beenin the life industry a process of change that continues to initiated with only limited consideration accelerate. This was always going to of Finance, and this has contributed to present challenges, but there are other the complexity of underlying systems factors which make it worse. Finance and and models. More subtly, Finance has particularly Financial reporting has long been dominated until very recently by been the poor relative in the life industry. the Actuarial profession, who tend to be It has always taken second place to sales more comfortable with estimates and less focused on detailed reporting disciplines and controls, than accountants. This has left Finance facing a greater scale of change than was or is generally understood by management and the Board, and less able to deal with that change. Key to any Business case is making this clear. So what are the issues that require investment? The next section highlights the common issues under three headings Systems and data, People and Reporting processes. Finance faces a greater scale of change than was or is generally understood by management and the Board7 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  11. 11. SySTEMS AND DATAAt a high level, every life company has the same data flow from underlying records through to reports.In Figure 4 we show the typical data flows within an insurance company.Figure 4: Typical data flows in an insurance company Financial Statements, FSA Returns Published Prices and other internal/external reporting unit Pricing General Ledger valuation System Investment Accounting other Sub-Systems Policy Administration Third parties e.g. Customers, Suppliers, Investments, Staff, Banks etc.Source: KPMG LLP (UK) 2012 Multiple systems on different platforms built at different times and potentially Multiple systems on different platforms from different companies acquired over time, need to interface to produce the built at different times and potentially from valuation calculations and financial different companies acquired over time reports. There are typically a number of issues with the core systems which are summarised in Figure 5.© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 8is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  12. 12. SySTEMS AND DATAContinued...Figure 5: Summary of key issues with insurers’ systems architecture Systems Issues Impact Provide: • Multiple policy systems (usually a result of multiple • As policy data forms core for acquisitions of old books) typically built pre-2000 reflecting revenue account, liabilities, • Premiums, claims requirements of that time EV and capital requirements & commission • Old systems, poorly documented and very difficult calculations the issues result in due & received/ to change high processing costs, reconciliation paid to accounting and development time across systems • Often do not have policy level accounting data & Policy multiple systems • Policy data for limited claims data for calculations as functionality Admin • Errors and inconsistent actuarial systems calculation of never fully developed data, resulting in reporting delays liabilities, • Requires complex & time consuming manual reconciliation and inefficiencies requiring Embedded values • Lacks flexibility and drill down capability to support changes extensive valuation and remediation & Capital in reporting, limited granularity • Changes to systems slow, costly • Produces actuarial and accounting data on inconsistent and high risk to reporting basis. Actuarial data often has serious data quality issues Provide: • Multiple models on different platforms, built over time • Subject to error and re-work, by Actuaries to support specific products, or blocks of resulting in reporting delays • Calculation of products, are not flexible to support current reporting • Outputs require significant expert policyholders’ requirements validation and review liabilities valuation • Poorly documented, lack flexibility and transparency • Inconsistent with accounting models • Built to support small number of runs and are inefficient records i.e. product hierarchy, which with long run times, require extensive manual intervention makes analysis and control of and subject to failure and re-work results overall difficult • Not well controlled internally • Changes difficult and risky to implement Provide: Investment accounting • Extensive EUCs required to support reporting, impairing transparency other • Investment • Do not fully support sub-fund product and asset matching and increasing risk of errors systems income and gains requirements • Potential for errors, requires • Expenses General ledgers Investment reconciliation and manual • Accounting calculations for different bases, Accounting • Multiple ledgers common following acquisition, using records and time spent manually reconciling interfaces to consolidate transactions between bases General • Ledgers and consolidation systems generally struggle to ledgers support multiple reporting bases – all major life companies report on at least three bases and enhanced analyticsSource: KPMG LLP (UK) 20129 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  13. 13. Each incremental change… has been covered by complex, ingenious – even brilliant- short term solutions, layered on top of the underlying systems…Almost without exception, the responseto these issues until recently has beentactical – end user computing (“EUCs”),primarily spreadsheets. This is true atevery level, be it data validation andmanipulation to build model point files,collating and analysing model outputs,providing analysis or reconciliations thatthe ledgers cannot support or deliveringmulti-GAAP reporting and enhancedanalytics. Each incremental changein internal or external reporting, newacquisition or restructuring has beencovered by complex, ingenious – evenbrilliant – short term solutions, layered ontop of the underlying systems, and on topof earlier EUCs. The problem today is thatwhilst each EUC no doubt made sense asa quick, cheap response to an immediateneed, overall they have led to a systemsarchitecture that makes no sense at all –it is incredibly complex, almost impossibleto understand, extremely difficult tocontrol or change and yet again poorlydocumented.The overall impact is very limited analysiscapability for internal business decisionsupport and external explanation ofresults and high risk of errors in reporting,and distrust from the markets and fromRegulators and ratings agencies. Thisin turn leads to poor decisions, greaterscrutiny, reduced share price, increasein capital requirements, all leading toincreases in costs and impacting profit.A suitable solution needs to be found.© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 10is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  14. 14. PEoPLE Developing, operating and managing all as a breed apart, there was limitedFinance leadership has the data, systems and processes are interaction between them, accountantslacked the vision, the skills people. The issue in life insurance finance and other professionals, and limited is very simple – the bulk of those currently demands as to the speed, quantityand often the inclination in a position to provide leadership and quality of reporting.to drive change developed their core skills prior to 2001, in a period when Actuaries were seenFigure 6: Summary of some of the key people issues Issues Impact • Accountants not • Finance responsible involved in calculation for reporting but unable of liabilities to explain technical Roles and issues or results, • Actuaries operate functions liabilities and movements unchallenged • Lack of finance • Limited review & leadership challenge control Actuarial • Little discipline around • Reporting inefficiencies Finance process reporting • Open to risk of errors deadlines Reports • Reviews performed Actuarial Control • Materiality differences models at different levels disciplines between accountants Annual of materiality Accounts and actuaries. • Analysis of surplus control judgmental & Recons performed at high level & Limited challenge analysis as receivers of • Actuaries developing • Inconsistent model opaque results systems separately, development, Multiple iterations outside of normal unsupported framework, and runs to IT development and leading to processing produce results run disciplines and review inefficiencies Systems – reporting delays • Predominance of tactical solutions • Excessive reliance created by Finance on individuals to run processes, review & validateSource: KPMG LLP (UK) 201211 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  15. 15. Complexity of systems, the proliferation of EUCs, the extent of data and modelling issues all led to excessive reliance on individuals with expert knowledge In Figure 6 we highlight some of the And all this is self-reinforcing. Finance challenges that have created structural leadership has lacked the vision, the and skills issues in the current environment, skills and often the inclination to drive where there is strong demand for quality change – which is challenging and analysis of results, and for efficient, uncomfortable, and is likely to undermine integrated processes and systems which their authority which is often based on require financial and other professionals their unique expertise in dealing with to work closely together. today’s problems. Conversely, the systems issues outlined in Figure 6 contributed to a further people issue – key man dependency. The complexity of systems, the proliferation of EUCs, the extent of data and modelling issues all led to excessive reliance on individuals with expert knowledge to run processes and to review and validate results.© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 12is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  16. 16. REPoRTING PRoCESS Solvency II will require Life companies to and loss attribution and to complete Finance will have to deliver the quarterly Quantative Reporting review and sign-off procedures in the Template (QRT) within six weeks to the following three weeks. produce a fully reconciled Regulators. In order to do this, Finance In Figure 7 we set out our view on balance sheet including will have to produce a fully reconciled what the expected close process will balance sheet including all liabilities by all liabilities by the end the end of week three, to allow sufficient be under Solvency II, benchmarked against a typical close today. of week three time to calculate required capital, profit Figure 7: Illustration of a future state quarterly quality close process under Solvency II over current close timetable Current process timeline Restatement adjustments (e.g. UK GAAP To IFRS)LEDGER CLoSE Asset Data Recs & Adjs to correct Policy Data data Further acceleration of ledger close components Agree Non-Recurring Expense Data Expense provisionsACTuARIAL RESERvING Current process timeline Economic Demographic assumptions & Expense & ESG’s Quicker and Assumptions generated Model runs higher quality Analysis of Current process – (all bases) analysis movement/ ‘Analysis change, and analysis surplus RCM’ in Wk 8 Model Point Files created of change Adjs Manual Reserves Significant acceleration of modelling calculated Pre Wk 1-2 Wk 3-4 Wk 5-6 Wk 7-8 Wk 9-10 Wk 11-12 Wk 12+AGGREGATIoN & ANALySIS SoLvENCy II – QRT Stress tests Additional modelling and reporting Capital calculations Quarterly QRT Current process timeline BU IFRS Result to Group Current process BU EEV ‘Board Approval Result & Results to Group announcement’ Press release Source: KPMG LLP (UK) 2012 13 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  17. 17. …CFOs are asking how will they reduce the process from twelve to six weeks and still be confident … disclosing externallyThe question CFOs are asking is how will So what are the issues behind the current As we can see the reporting processthey reduce the process from twelve to timetable? We believe these can be issues are closely interrelated to thesix weeks and still be confident with what summarised as shown in Figure 8. technology and people issues.they will be disclosing externally.Figure 8: Summary of reporting process issues and their impact Reporting process issues Impact • Poor processing controls result in errors being detected • Re-work delays and disrupts the reporting process late in the process • Excessive time spent reconciling results on different • Multiple reporting bases supported by different teams bases, duplication of effort Reconciliation and different systems and models & Re-work • Length of run times are uncertain and can lead to • System constraints on analysis of surplus make it major delays estimate based and highly judgmental • It takes 2-3 weeks to generate inputs to models due • Inefficient manual processes which requires extensive to manual intervention required review and correction • Heavily reliant on EUCs which are inflexible and require • New reporting requirements result in additional layers Data and model manual intervention of EUCs, increasing complexity and processing speeds point creation • Number of models developed long time ago, when • Model structures not built to run on fast reporting calculations were deterministic and liabilities only timescales calculated twice a year Model • Multiple models result in multiple inputs, competition processing • All calculations are based on same underlying data and for run space and problems with reconciliation and times core cashflows – however can be different models for analysis different reporting bases • Multiple models inefficient and difficult to control • Can be different models for different products and changeSource: KPMG LLP (UK)2012© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 14is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  18. 18. CoNCLuSIoN:The business case “Why shouldwe make this investment?”case Major Finance change programmes We have put some indicative values on there is a compelling business involve significant costs, but there are the benefits based on our experience substantial benefits for most life insurers. with a number of clients. Clearly these Regulatory compliance is a given, and we values are all dependent on each individual would expect any business case to reflect company’s circumstances and the level the incremental cost of improvements of investment made. Nonetheless, in over and above any regulatory minimum. general we believe there is a compelling We would expect to see the following business case to be made. There are items, highlighted in Figure 9, in the some clear financial benefits, such as business case. reducing operational costs and capital, through reduced operational risk –Figure 9: Summary of benefits of change Issues Investment and benefits value • Cost of Finance has generally increased recently with • Looking forwards, KPMG believe that Estimated at 20% high project spend and some level of external support there are significant opportunities for to 30% of the operational to business as usual in the lead up to Solvency II cost reduction in key processing areas cost of Finance Efficiency • Most life companies, however spend a significant such as; proportion of their people costs in Finance on low value – Policy accounting processing, which can be significantly more efficient – Data extraction and management with the introduction of the appropriate technology – Model development and processing • Most Life companies hold significant reserves for • Enhanced controls and improved Estimated 50% of the risk of accounting and actuarial misstatements, quality of reporting will result in a explicit or implicit Capital either explicitly or implicitly through the use of product release of reserves and a reduced reserves & 10% & Cash assumptions. They will also hold Capital for Operational capital requirement of Op Risk Capital Risk, which will again be increased if there are reporting issues • Financial Reporting will continue to change to meet • A more robust and flexible IT and Estimated value Reduced cost internal and external requirements – IFRS is the obvious modelling platform, supported by 25% of annual of future example, but will only be a part of developments over reduced key man dependencies will Finance change change the next 10 years. For many Life companies, changing reduce the costs and increase the budget Finance is very hard and very expensive at present speed of change Improved • In practice we have found over the last three years that this • Enhanced controls, transparency and Estimated speed & is the key driver of Finance change, and is a major benefit quality of analysis will reduce the risk of value up to quality of but one most life companies only consider fully when the error and improve the quality of external 5% of Market reporting risks of errors and misunderstanding actually crystallise presentation of results capitalisation • Poor quality, late management information with limited • Faster, more reliable management Benefit to be Improved drill down capability can result in inefficient decision information, supporting business decisions determined by business making. More time spent by Finance on reconciling on best uses of capital will improve return the business decision and re-working than value-added analysis of results/ on investment as well as reducing overall support metrics and trends capital costs i.e. allocating available capital more efficiently less reliance on more expensive external debtSource: KPMG LLP (UK)201215 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  19. 19. Key to the business case approval will be ensuring the Board are clear on the impact of not making the right investment from a commercial and operational perspective many Life insurance companies have Key to the business case approval substantial reserves set aside for potential will be ensuring the Board are clear errors – but arguably the biggest benefit on the impact of not making the right is mitigating the risk associated with poor investment from a commercial and financial information both internally and operational perspective. externally. Companies typically end up In our next article we will be looking at spending substantial sums of money to some of the underlying solutions to these address these risks when they crystallise issues and their benefits based on our but this is arguably too little too late as experience of best practice working with the damage is already done. some of the UK leading life companies. Taken together the issues we have For further information on KPMG’s highlighted in this article, represent Insurance Finance transformation a significant barrier to change that position, please visit our dedicated cannot be dealt with incrementally website3. Should you have any questions through tactical measures. It requires an relating to the issues raised in this article integrated solution that will bring finance or, questions relating to your firm’s up to the standards required by Solvency finance transformation business case, II and increasingly expected by external please feel free to speak to your usual markets and Boards. KPMG contact or one of our subject matter experts listed. 3 www.kpmg.co.uk/insurancefinancetransformation© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and The business case for change 16is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  20. 20. Contact usPaul Bishop Andrew LyonInsurance Finance People and ChangeTransformation Leader T: +44 (0) 787 675 6332T: +44 (0) 780 261 4970 E: andrew.lyon@kpmg.co.ukE: paul.bishop@kpmg.co.uk Gavin LubbeMartina Neary SystemsFinance Transformation T: +44 (0) 781 730 6775T: +44 (0) 779 744 7092 E: gavin.lubbe@kpmg.co.ukE: martina.neary@kpmg.co.uk Phil BrookeBrid Meaney Financial Services SourcingFinance Transformation T: +44 (0) 759 556 5121T: +44 (0) 782 795 4938 E: phil.brooke@kpmg.co.ukE: brid.meaney@kpmg.co.uk Louise PortelliRichard Care ProgrammeModelling T: +44 (0) 759 556 5121T: +44 (0) 777 059 8349 E: louise.portelli@kpmg.co.ukE: richard.care@kpmg.co.ukDaniel ClarkExternal ReportingT: +44 (0) 781 111 1962E: danny.clark@kpmg.co.ukwww.kpmg.co.uk/insurancefinancetransformationThe 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 accurateand 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 onsuch 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.RR Donnelley l RRD-263427 l March 2012 l

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