Solvency II: Payback Time

Transcription

1 IBM Global Business Services Thought Leadership White Paper Solvency II: Payback Time Financial Services

2 2 Solvency II: Payback Time Introduction In response to the far-reaching nature of Solvency II regulation and guidance, most insurance companies have earmarked significant sums of money to spend on Solvency II compliance, often after significant pain at board level. While capital efficiencies will have been factored in, the broader operational business benefits are often less clear or not considered at all. Some companies have committed to the delivery of specific business benefits and may, or may not, have defined plans to realise them. Some may have made loosely defined statements around business benefits and are likely to have no specific plans to secure or track them. Others may have no such commitments, but may yet come under pressure to realise benefits from their investment. Realising benefits Realising these benefits can be challenging and will often require careful analysis and strong management. IBM s experience with clients is that expert insight is critical in working through complexity and resistance. To sustain benefits over the long term will demand an integrated approach to managing finance architecture that is currently absent in many insurers. There is a risk that companies will not always reap the benefits of their significant investments. IBM s recommendation is that insurance finance functions should be proactively working on benefit realisation and maintenance plans as their Solvency II programmes move into implementation, and that immediate steps are taken to ensure their investments are protected. IBM believes that, as programmes deliver compliance, the attention of management, boards and analysts will switch to benefit realisation. Indeed, some insurers are taking the view that early delivery of their solutions is important for benefit release, even if regulatory implementation is deferred. This white paper will examine how benefit can be extracted, both in the longer term and the much shorter term.

3 IBM Global Business Services 3 Strategic benefits Insurance companies have to a greater or lesser extent built Solvency II solutions using strategic data infrastructures. The key features of these data infrastructures are: 1. Structured data repositories, ideally set up in a way that data can be joined from one store to another (for example policy data to results data). 2. Shared, parameterised, centralised rules, such as business hierarchies (how products map to lines of business, how entities are interrelated). 3. Flexible and shared reporting environments, enabling consistent usage of data across a range of user groups (particularly actuaries and accountants). 4. Very granular data, ideally at policy and transaction level. Figure 1 shows a generalised strategic finance architecture, with the key data repositories and ETL s (Extract Transform and Load tools which execute the transformation rules) shown in pink, and the finance-specific applications shown in yellow. Policy data Source systems ETL Asset data ETL Actuarial calculations ETL Results data ETL QRT reports GL Accounting consolidation tool Figure 1: Generalised strategic finance architecture

4 4 Solvency II: Payback Time Individual companies may have only implemented parts of this, or may have done so to an intermediate state. IBM sees a clear progression along an arc of progress as companies gradually develop their data infrastructure. Figure 2 outlines this path, showing how business optimisation and analytics maturity develop together. As companies continue to progress along this path, more and more opportunities to avoid cost and deliver additional functionality and efficiency will arise. Business optimisation Business process integration Customer and partner collaboration Breakaway Prescriptive, real-time, pattern-based strategy with situational context Flexibility in internal processes Process automation and workflow Differentiating Competitive Task integration Workgroup design Command and control Ad hoc Spreadsheets and extracts Foundational Data warehouses, governance and production reporting Master data management, metrics, dashboards/ scorecards Predictions, contextual business rules, pattern recognition Information and analytics maturity Figure 2: Business optimisation and analytics maturity development

5 IBM Global Business Services 5 Some examples of these longer-term benefit opportunities are: New business value analysis where actuarial results data has been made available in a structured data store, insurers can connect it to agent and channel data, thus establishing profitability by agent or channel. This sort of analysis is extremely valuable to an insurer in managing its distribution. Where Solvency II programmes have put the policy and actuarial data in place, this benefit will be obtained much more cheaply than otherwise. Customer value analysis similarly, by connecting actuarial results to customer data, insurers can unlock analysis of value by customer segment. Once again, this will be of great value and obtained relatively cheaply. Post Retail Distribution Review (RDR) the linkage between customer, policy and digital channel data will be critical to allow insurance companies who choose to market and sell direct to their customers, the ability to understand their behaviours, needs and activities. Experience analysis where Solvency II has brought richer movement data through, much more effective experience analysis can be built. This gives a far more detailed and reliable understanding of the insurer s exposure by product and over time. This will aid product design and permit more accurate (and less capital-hungry) reserving. Government screening and tracking linkage between customer and policy data will be critical in allowing companies to identify customers for screening and tracking purposes. Current examples are FATCA (Foreign Account Tax Compliance Act) identifying US taxpayers across all financial accounts and relationships, and HM Treasury Watch List Screening. Mis-selling and compensation if future mis-selling or compensation events occur, granular and easily analysed policy, customer and actuarial results data will dramatically ease the pain of identifying affected cases, and calculating and applying redress. International Financial Reporting Standards (IFRS) 4.2 a key feature of well-designed strategic finance architectures is that business rules are centralised, parameterised, and shared between user groups particularly actuaries and accountants. Where this has been applied in building a Solvency II solution, and granular data has been made available, insurers will be well-placed to make changes to rules to implement IFRS 4.2 with minimal cost. New product launches parameterised rules will support a well-engineered solution to accommodate new product launches rapidly and cheaply, with all elements of the solution picking up the changes in an integrated way.

6 6 Solvency II: Payback Time Mergers and acquisitions (M&A) a scalable and parameterised solution should easily incorporate new sources of data and new ways of reporting. This can be particularly marked where data sourcing standardises information before it reaches calculation engines and reports, thereby de-linking source and target. Administration system rationalisation as for M&A, a de-linked, standardised source-to-target data transformation can allow new administration systems to be plugged in with drastically less cost. Outsourcing similarly, administration data can be handed to third party operators with little difficulty. More interestingly, calculation or reporting could also be outsourced more readily. The modular nature of good finance systems architecture lends itself to a more flexible business approach. Offshoring by transferring reporting and user interfaces into enterprise IT tools rather than spreadsheets, operating in multi-user, multi-location environments becomes more practical. Strategic Management Information provisioning as insurers develop their understanding of what data they need to run their businesses and how to distribute it, the more strategic Solvency II solutions will make a strong contribution to the future provision and usage of information within the organisation. It is evident that a well-designed financial systems architecture, developed as part of Solvency II, will unlock significant savings in the long term. Even if Solvency II has only taken partial steps along this route, it can serve as a building block for later development. Some insurers have focused on building a sophisticated Pillar 3 solution and felt that their policy and asset data sourcing was adequate. Others have concentrated large efforts on their data. Either can be a first step to costefficiency and strategic capability. There is a clear need for control and a roadmap to stay on track and not degrade the cost-efficiency of the architecture. It is all too easy to take a tactical shortcut that breaks the architecture and prevents future cost savings. Core principles need to be defined and adhered to. Key examples from IBM s experience are that all aspects of the architecture should be: a. Purpose agnostic (between, for example, IFRS, European Embedded Value (EEV) and Solvency II). b. Product agnostic (for example between annuities and unit-linked pensions). c. User agnostic (for example between accounting, actuarial and marketing staff). Maintaining principles through future developments will require a revised joint governance function between Finance, Business and IT, with a clear architectural vision and strong powers to protect the company s investment. IBM has helped clients to implement these functions and our experience is that organisational change of this nature is vital to establishing the behavioural changes needed to continue driving efficiency.

7 IBM Global Business Services 7 Realising benefits in the short term While Solvency II investment can give rise to strategic benefits in the long term, there are also opportunities for immediate benefit. It is common to see Solvency II programmes begin by focusing exclusively on the functional requirements of Solvency II in effect the need to calculate new numbers and the need to report them to the regulator. The operational details of how these are done, and who does them, is sometimes ignored. These features process design and organisational design largely drive the cost of the finance area going forward. Addressing these using IBM Lean approaches and Finance Transformation expertise can realise benefit rapidly and cheaply. The benefit opportunities depend on the nature of the Solvency II solution in the particular company. A first step is to evaluate the potential based on the following areas. Data quality Solvency II regulations and guidance dwell on ensuring and evidencing data quality. Companies have responded to this by making improvements to data sourcing principally policy data, but also asset data. These changes will generally lead to more confidence in data production and management, and, ultimately more rapid correction of errors. IBM s experience in optimising finance processes shows that poor data quality can lead to checking and rework levels which could be up to 100 percent of the underlying right first time process cost. Depending upon the improvements made to data sourcing, significant savings can be achieved in downstream processes and organisation structures. Automation In some cases companies have automated some or all of their workflow particularly around data transfers and quality processes, and sometimes around the operation of calculation engines. This should drive direct savings from reduced manual effort and indirect savings from faster, or higher quality processes with less rework. Performance To cope with increased calculation requirements, specifically for volumes of scenarios, companies have often implemented more powerful modelling systems. This can change the profile of demand for resources during reporting periods by allowing numbers to be ready earlier. A careful analysis of demand profiles, and work on moving or flattening peak demand, can release resource from reporting teams. Parallel reporting In improving reporting, some companies have built more structured and controlled results systems, reducing the use of spreadsheets and using more professional IT toolsets. This should permit a more parallel operation, with multiple bases and versions being analysed simultaneously. Essentially, the investment in improved toolsets can allow finance staff to better manage complexity and operate much more effectively. Understanding how processes can be changed to take advantage of this can lead to efficiency gains, or could alternatively be used to deliver faster or more frequent reporting.

8 8 Solvency II: Payback Time Analysis In the most complete solutions, companies have built sophisticated data stores where information from various business areas, typically accounting and actuarial, can be joined together and analysed. This can lead to faster and more focused analysis, particularly enabling better Variance Analysis or Profit-driver analysis functions, which usually consume large amounts of time and expensive resource with spreadsheets. As with most improvements in analysis capability, there is a danger that people do more analysis, rather than complete their current tasks faster. Companies should be looking to realise significant savings from these investments. Decommissioning The implementation of robust data solutions as part of Solvency II can result in some companies being able to take out unused or replaced systems, along with their licenses, hardware and support roles, leading to direct savings. An interesting example of this is the reclamation of actuarial results storage. Actuarial systems can produce huge amounts of results, which are often duplicated and uncontrolled across networks, consuming large amounts of expensive storage. Database storage of actuarial results can give rise to the opportunity to rationalise storage, with potentially significant savings. A degree of care needs to be applied in the presentation and communication of this work: the identification of savings opportunities is highly likely to find unfinished work in the Solvency II implementation, which may appear as increases in costs. For example, many programmes may not have fully implemented the more rigorous data governance standards required by the regulation. Stakeholders should be prepared to find areas of incompleteness, and corresponding rectification costs, as well as savings opportunities. Provided the Solvency II programme has been fairly thorough, the savings should outweigh the costs of finishing the work of the programme. As this work must be done eventually, the issue is one of presentation and timing. Analysis may well find that there are opportunities to extend the Solvency II infrastructure to other purposes for example EEV and IFRS to get more benefit. In particular, this can allow for the removal of function duplication and deliver more economy of scale. This sort of extension may appear as a further investment opportunity on the back of the Solvency II infrastructure, with its own benefit case. After the first step of identification, some of the opportunity areas above can be actioned rapidly. Others may involve more careful work to understand the full implications and articulate the choices around the company s future operating model.

9 IBM Global Business Services 9 Protect your investment To ensure that companies will be able to derive any benefit from their investments, there are some steps that should be taken now. As soon as Solvency II moves to Business As Usual, there is a need to put an integrated testing and release management capability in place to ensure that changes to each part of the new infrastructure works together, and do not introduce the need for new manual workarounds. Many clients have experience of systems degrading due to inadequate protection from uncontrolled change. Unfortunately, sophisticated systems can decay within months of launch if the necessary process and organisational changes are not put into place. It is important that immediate steps are taken to protect a company s Solvency II investment. Beyond testing and release management, a company may need to consider changes to architecture governance, as discussed above, to sustain benefits in the long term. Conclusion This white paper has shown that there is a wide range of additional benefit opportunities arising from Solvency II investment. Leading insurers are taking steps now to realise these. IBM has a three-stage approach to helping clients do this: 1. Protection IBM will conduct an implementation healthcheck of your programme, to evaluate and advise on your preparation for transition to Business As Usual. This will set out any additional steps you need to take now to make sure your investment is protected in the short and long term, and to ensure you can drive out the additional benefits. 2. Realise benefit now IBM will work with you on rapid operational improvements, initially through a quick diagnostic to identify benefit areas and then further engagement to realise them. 3. Plan for payback IBM will help you develop a roadmap for guiding strategic benefit release, and support you in navigating this roadmap over the longer term. IBM will help you to implement your own governance solutions and actively support you in operating them. In summary, companies face a choice as to whether they seize the opportunities presented by Solvency II, and pursue them now and in the future, or whether they miss them and risk losing much of their investment.

10 10 Solvency II: Payback Time Contact Graham Olsen Senior Managing Consultant, IBM Global Business Services Tel: +44 (0)

11

12 Copyright IBM Corporation 2012 IBM United Kingdom Limited 76 Upper Ground South Bank London SE1 9PZ Produced in the United Kingdom May 2012 All Rights Reserved IBM, the IBM logo and ibm.com are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. If these and other IBM trademarked terms are marked on their first occurrence in this information with a trademark symbol ( or ), these symbols indicate U.S. registered or common law trademarks owned by IBM at the time this information was published. Such trademarks may also be registered or common law trademarks in other countries. A current list of IBM trademarks is available on the Web at Copyright and trademark information at ibm.com/legal/copytrade.shtml Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. Please Recycle GBW03177-GBEN-00