A Risk-Adjusted Operating Model for Insurers: Addressing Regulatory and Market Demands

A Risk-Adjusted Operating Model for Insurers: Addressing Regulatory and Market Demands

While most insurers have recovered from the fiscal crisis of 2008, significant challenges remain on multiple fronts as operating models are subject to the pressures of both regulatory and market demands. From our discussions with insurers, regulatory requirements are becoming a greater challenge, as legislators responded to the increasing complexity and uncertainty of global financial markets by tightening requirements related to equity, governance and transparency. Implementing these changes to their capital structures, and their governance and reporting processes, can leave insurers facing considerable costs. From a market perspective, regulatory change leads to further market harmonization and consolidation. This may put pressure on profitability, which is difficult for insurers to increase under the current low yield environment. The level of competition in the insurance industry has been steadily rising, leading to greater market share for the bigger players. There is no indication in our view that this market consolidation will come to an end in the near future. To deal with these new and sometimes conflicting demands, insurers should allocate their resources wisely on a number of fronts: ORGANIZATION Many insurers find themselves creating new functions while seeking to increase collaboration and communication among functions such as strategy, risk and capital management or finance. They are trying to identify, retain and develop better levels and mixes of talent so that these functions can help generate real value within the organization. PROCESSES Regulatory and competitive pressures have pushed insurers to integrate their finance and risk processes and to streamline their processes for activities such as strategy setting, asset liability management, investments, financial closing and reporting. They are looking at ways to rationalize their current portfolios of products and investments while seeking greater overall execution efficiency. And, in some cases, they are redesigning processes altogether. TECHNOLOGY Insurers are investing in new tools including big data and analytics in their efforts to improve the efficiency and effectiveness of risk-adjusted steering, from strategy setting for product development to capital investments and financial as well as regulatory reporting. They are standardizing and, where possible, automating process elements, but they are also harmonizing, consolidating and integrating underlying technology platforms. DATA Complex regulatory and market requirements underscore insurers need for high-quality, properly organized and readily accessible data. Insurers are emphasizing data management, data quality and data storage while exploring shared metric systems and data-driven solutions. Insurers addressing these interlocked elements of the operating model, however, are finding that they also need to look at the operating model itself. Ideally, insurers can respond to regulatory and market challenges in such a way as to create real, sustainable competitive advantage. This means designing what Accenture has termed a Risk-Adjusted Operating Model (RAOM) a model that supports value generation by optimizing the generation and use of capital while minimizing operating, financial and regulatory risk. 2

DRIVING FORCES OF INSURANCE OPERATING MODELS Regulatory Challenges Uncertainty - Complexity - Implementation cost - Transparency requirements New functions Collaboration Roles and responsibilities Finance and Risk process integration Closing processes Portfolios and products New tools (e.g. big data, analytics) Reporting requirements Standardization and automation Data management Data quality Data storage and historization Shared metric systems Organization Processes Technology Data Optimal mix of talent Support value generation Execution efficiency Process innovation Alignment and integration Harmonization, consolidation and integration Value adding tools New technologies (e.g. big data, analytics) Data-driven solutions Data management efficiency Financial environment - Competition - Profitability - Innovation Market and Industry Challenges Source: Accenture, January 2015 3

ELEMENTS OF A RISK-ADJUSTED OPERATING MODEL Developing and implementing a Risk- Adjusted Operating Model entails the transformation of strategy, risk, capital, financial and performance management by aligning and optimizing the aforementioned elements of organization, process, technology and data. This involves the implementation of a risk-adjusted strategic planning, risk-based capital optimization and risk-adjusted performance management at multiple levels. A key element of this transformation is the adaptation of a centralized capital optimization and steering approach covering all phases from planning, to evaluation and monitoring, to execution. Implementing RAOM requires improvement and alignment in a number of areas including: STRATEGY Risk should be aligned with overall business strategy, and embedded through the use of scenarios and models, testing how various strategic options might unfold. RISK MANAGEMENT The contribution of enterprise risk management (ERM) can be enhanced as it evolves from a compliance-driven activity to a value-delivering capability. CAPITAL MANAGEMENT A risk-based capital model can support capital allocation decisions from a riskversus-reward standpoint. PERFORMANCE MANAGEMENT The adaptation of performance-based key performance indicators (KPIs) to risk-adjusted metrics can integrate the risk perspective into performance management. FINANCIAL MANAGEMENT The budgeting and planning processes should help ensure both an accurate view of economic versus available capital and an overall risk-based view of the financials. Insurers considering a transformation to RAOM should also work to align organization, processes, technology and data to benefit from improved interaction in terms of strategy, product and investment decisions and to increase and stabilize potential profitability. The risk management function, for example, should be aligned and integrated within the organizational structure to support value generation. Similarly, the institutionalization of a risk function connecting the various lines of enterprise risk management (ERM) may help realize enterprise value generation. Risk processes can be integrated with core business and finance processes, while risk can also be aligned with overall business strategy and steering methodology. In technology, siloed and fragmented risk architectures can be integrated to support the full use of risk management tools and models. Centralized source systems and/or databases can also support the integration of risk, financial and business information. Through risk-adjusted performance management, key risk indicators (KRIs) and technologies such as risk dashboards, insurers can better integrate risk, business and financial reporting. To verify the availability, consistency, quality and traceability of data, insurers should consider establishing a consistent data management framework, along with clear data governance structures to help promote effective management and use of data. 4

CAPITAL OPTIMIZATION AND STEERING A centralized approach to capital optimization and steering requires close interaction among various areas of the business. In the planning phase, the insurer should conduct risk mapping, risk appetite definition, capital planning and allocation, and the implementation of risk policies and limits. In the evaluation phase, priorities include risk and capital calculations on different levels (for example, by business unit, or aggregated) within parameters established during the planning phase. Monitoring of capital optimization and steering includes the verification of whether results are in line with the way they were set up during planning for example, whether the planned risk appetite matches up with operating realities. Finally, in the execution phase, the insurer makes adjustments as needed to optimize the capital allocation, metrics and other elements in place. RISK-ADJUSTED OPERATING MODEL (RAOM) FRAMEWORK Performance Management Organization Data Execute Financial Management Plan Strategy Monitor Processes Evaluate Technology Risk Management Capital Management Source: Accenture, Managing Successful Finance and Risk Transformations in the Insurance Industry, November 2014 5

TRANSFORMING TO A RISK-ADJUSTED OPERATING MODEL The central idea behind the transformation to a Risk-Adjusted Operating Model is to leverage regulatory investments to improve performance, reduce costs and complexity and generate value. One important initiative is the alignment and integration of the existing governance system. This incorporates strategic planning and the risk management function, but also encompasses functions such as actuarial, finance, budgeting and planning, control, capital management, compliance and internal controls. Another measure is the development of new organizational structures for planning and evaluation work and sub-work groups such as the strategic risk and planning committee, the strategic capital allocation committee, the KPI/KRI definition work group, and the performance monitoring and performance management committees. With these in place, the insurer can focus on adjusting the existing roles and responsibilities of functions such as strategic position, risk identification and assessment, risk analytics, actuarial, finance, control, and capital management, as well as product development, underwriting, pricing, marketing and sales, and human resources. Once organizational structures are established and functions adjusted and assigned, attention can shift to the alignment and integration of existing processes such as strategic positioning, risk identification, assessment and control, risk reporting and communication, capital absorption, strategic objective setting, risk appetite setting, capital allocation, underwriting and pricing, and performance measurement and monitoring. In many cases, it will be necessary to define and implement new processes. These may include management of parameters and assumption; definition and assessment of KPIs and KRIs; planning and evaluation; strategic planning; risk planning; business plan assessment; strategic capital allocation; capital absorption calculation; risk-adjusted profitability measurement; and overall business performance assessment. 6

TRANSFORMING TECHNOLOGY, DATA MANAGEMENT AND REPORTING An integrated, holistic risk finance solution calls for the consolidation of technical architecture, tools and data. The technical architecture can include components such as risk, finance and strategic architecture, extraction, transformation and loading layers, data storage solutions and overall reporting. Along with the technical architecture, existing tools and systems such as strategic and risk tools, risk and economic capital models, documentation, publishing and traceability tools, the document management system, the KPI and KRI dashboard, underwriting, pricing and customer relationship management (CRM) tools should be assessed for integration as well as analytics, big data and digital solutions. Transformation project teams may need to undertake the development of new reports as well as the integration of existing reports. This involves defining the reporting framework and consolidating the overall report dashboard. New reports may include risk-adjusted strategic planning, economic capital, risk-based strategic reviews, a catalog of KPIs and KRIs, and reports on overall performance measurement and business department and/or unit performance. There are also numerous data concerns to address including: DATA GOVERNANCE Governance policies, as well as the governance model and assigned roles and responsibilities. MASTER DATA AND META-DATA MANAGEMENT Data classification and traceability and establishment of a master and meta-data repositories. DATA QUALITY Data quality strategy and dedicated data quality measures and criteria. DATA CONVERSION/DATA INTEGRATION Data exchange procedures and data integration activities. DATA ARCHITECTURE Data modeling and classification of data taxonomy relating to both structured and unstructured data. DATA SECURITY The data security concept, data security roles, and the definition and assignment of roles. 7

KEY MEASURES IN A RISK-ADJUSTED OPERATING MODEL IMPLEMENTATION Once matters related to organization, processes, technology and data have been addressed, transformation teams can turn to three major elements central to the implementation of a Risk- Adjusted Operating Model. RISK-ADJUSTED STRATEGIC PLANNING (RASP) Risk-adjusted strategic planning helps enhance the quality of decision making and represents the ability of senior management to understand and balance opportunities and risks in the best interest of the organization. This involves not only the decision making process itself, but also the monitoring process to verify that the actions taken are implemented as desired. When implemented, RASP can not only help improve decision making but also help yield cost savings from streamlined processes and the elimination of redundancies. Establishing RASP entails the integration and alignment of the existing governance system for example, linking risk identification and assessment with strategic positioning and evaluation in business planning; linking the actuarial function with strategic planning; and the compliance function and internal controls with strategic positioning and monitoring. New organizational structures such as an interdisciplinary planning and evaluation work group (encompassing ERM, the actuarial function, and strategic planning) and a strategic risk and planning committee should also be put in place. Other elements related to RASP implementation include the alignment and integration of existing processes, such as strategic position and evaluation, with risk identification and assessment; strategic choice, risk control and internal control; business strategy and risk strategy; the strategic communication process; and the risk reporting and communication processes. New processes should also be defined and implemented; these include definition and application of parameters, assumptions and KPIs/KRIs; risk-adjusted strategic decision making, and riskadjusted strategic reporting processes. 8 Technology considerations in RASP include the consolidation and integration of technical architecture components (such as shared architecture for risk and strategy, enhanced extract-transform-load layers to apply risk data in strategic tools, and centralized data storage) and the integration of existing tools and systems and the development of new tools. These might include strategic positioning templates and/or tools; strategic assessment tools for stress or scenario testing; and consistent usage and workflow for a document management system, such as uploads, updates, changes and reviews. Another technology concern is the integration of existing reports and the development of new reports and dashboards on consolidation for strategic evaluation, risk identification and assessment, or for riskadjusted strategic planning report definitions. Finally, data elements of RASP include the definition of data management components such as RASP data management roles including assignment; RASP data definition; classification of master- and meta-data; a RASP data model; and RASP data quality measures and criteria. RISK-BASED CAPITAL OPTIMIZATION (RBCO) Risk-based capital optimization supports the appropriate allocation of capital at an enterprise/business unit level, and, as an increased infusion of a holistic risk perspective, it can help confirm scarce capital is deployed more effectively. This calls for investments in economic capital models and the ability to make decisions on the deployment of capital at both the enterprise and the business unit level. Firms with riskbased capital optimization not only improve their use of capital but can help establish and maintain consistent performance measurements between business units. Organizational steps taken toward riskbased capital optimization include the integration and alignment of the existing governance system and the integration of the risk management function with budgeting and planning and with the strategic planning function to, for example, help define and assess capital absorption. Other tasks can include the establishment of new organizational structures such as an interdisciplinary planning and evaluation work group (encompassing capital management, budgeting and planning, and ERM); an extended planning and evaluation sub-work group (with product development, underwriting marketing and sales, and human resources); and a strategic capital allocation committee. The alignment and integration of existing processes can facilitate the budgeting and planning process for example, with stress and scenario testing or sensitivity analysis from ERM -- to assess the appropriateness of capital absorption. New processes to be defined and implemented include strategic objectives assessment, risk-adjusted profitability measurement, capital absorption calculation, and the business plan assessment. In terms of technology, key considerations in risk-based capital optimization are the consolidation and integration of technical architecture components such as integrated risk and finance architecture and centralized storage of shared data, including endto-end trace back capabilities. Existing tools and systems such as economic capital and risk capital models, capital allocation and risk analytic tools should be integrated, as well. Existing reports such as budgeting and planning, capital management and risk management may need to be integrated or consolidated, along with economic capital reports. Data management concerns in riskbased capital optimization include data classification of elements such as strategic objectives, risk typology, valuation metrics, risk and capital calculation, cost of capital, diversification and volatility factors, as well as documentation in the master and metadata repository, the RBCO data model, and data quality measures and criteria.

RISK-ADJUSTED PERFORMANCE MANAGEMENT (RAPM) Risk-adjusted performance management can help improve the effectiveness of insurers operative process management and the generation of value. In general, it is the application of objective and quantifiable key risk indicators to assess the risks inherent in the different operating processes. The keys to risk-adjusted performance management include a standard understanding of risk measures with a common risk taxonomy and the ability to measure risk exposure in various areas of the business. Firms with this capability can undertake accurate evaluations of the performance of business units, identify business units which take large risks, and reduce potential losses. Organizational priorities for RAPM include the integration and alignment of the existing governance system and the integration of the risk management function with the strategic planning function as well as other functions such as finance, control and capital management. It may be necessary to establish new organizational structures such as KPI/KRI definition work groups (to define, discuss, assess and challenge common KPIs and KRIs), or performance monitoring and management work groups and committees to monitor and assess performance measures, development and trends. Among the technology considerations in RAPM are the consolidation and integration of technical architecture components such as integrated risk, finance, control and capital management architecture, and a centralized repository of common metrics such as KPIs and KRIs. Existing tools and systems (economic capital model, KPI/ KRI dashboards, enhanced underwriting and pricing tools and CRM tools) should be integrated as well. Existing reports, including the KPI/KRI catalog, metrics development report, and risk-adjusted performance measurement reports on multiple levels such as business unit or line of business should be integrated; if such reports are needed, but do not exist, they should be developed. Data management concerns in RAPM include assignment, data classification, documentation in master and meta-data repositories, development of an RAPM data model and taxonomy, and creation of data quality measures and criteria. Candidates for process alignment in RAPM include strategic objective and risk appetite setting, capital allocation, underwriting, pricing, and employee and business performance objective setting and assessment. New processes such as KPI and KRI definition and monitoring, overall performance assessment and monitoring should also be defined and implemented as needed. 9

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IMPLEMENTING A RISK-ADJUSTED OPERATING MODEL A typical implementation and delivery approach for RAOM is usually performed in a structured and phased approach including a Confirmation and Master Planning phase, a Base phase and an Implementation phase. The Confirmation and Master Planning phase is intended to set a prioritized value agenda for achieving a target RAOM solution (to-be). To seek this, the operating model components; organization, processes, technology and data are assessed to their current status (as-is). Improvement potential may be identified using a quantitative KPI/KRI-analysis or a more qualitative analysis identifying unrealized integration and collaboration potential. During the RAOM Base phase, the insights and the decision on the client specific value agenda from the Confirmation and Master Planning phase are used to shape a detailed implementation plan considering the functional, organizational and technical components of the client specific value agenda. While the Confirmation and Master Planning phase identifies what is to be changed for the target RAOM, the Base phase defines in detail how this change will be carried out. The actual change to the insurer s operating model is conducted in the final Implementation phase, in which the necessary changes which were previously identified and agreed to, are actually realized in close collaboration with the insurer s employees. From an organizational perspective, this may include the actual staffing of committees under the consideration of resource constraints as well as the coaching of participants to get them to understand and fulfill their roles as necessary. It may also include the coordination of new or adapted communication processes involving those committees, or the selection and implementation of software adapted for technological infrastructure and data requirements. For the success of an RAOM transformation, it is important to focus on the value generation perspective of each of the implementation components. The costbenefit considerations are therefore important, as acceptance of the change will be improved once the value of the different implementation measures is understood by the affected business units, departments and employees. Adaptation and implementation of a Risk- Adjusted Operating Model can help insurers address multiple challenges from regulators, competitors and a rapidly changing marketplace. By addressing the key elements of organization, processes, technology and data, insurers can leverage the time and resources required for regulatory compliance and put themselves in a stronger competitive position, not only by reducing costs but by making themselves more able to meet the demands of their customers. IMPLEMENTING A RAOM IS USUALLY PERFORMED IN A STRUCTURED AND PHASED APPROACH RAOM Implementation Approach - Example Confirmation and Master Planning Phase Base Phase Implementation Phase 6-8 weeks 2-4 months Prioritized value agenda Functional, organizational and technical design for value agenda including implementation plan RAOM implemented Exemplary activities per phase: Definition of aspiration level for Risk-Adjusted Operating Model Assess current operating model components (as-is) and identify gaps to target solution (to-be) Derive measures for realization of to-be state Develop business case(s) and assess measures Prioritize measures based on business case results Decide on measures supporting value agenda Review prioritization of selected measures, analyze interdependencies, and adjust business case(s) Design functional, organizational and technical components based on prioritized measures Identify software requirements and conduct software selection process Develop detailed implementation plan with dedicated milestones, implementation timeline, deliverables and initial effort estimation Determine technology-based interdependencies between RAOM measures Execute implementation plan to achieve RAOM on the respective implementation levels: Organization Processes Technology Data Regular assessment of business case assumptions and validation of results Source: Accenture, January 2015 11

HOW ACCENTURE CAN HELP Accenture has decades of experience in helping firms identify and design a finance and risk operating model suitable for their business needs, taking into consideration the insurer s business model, culture, steering approach and desire for enterprise value maximization. We make use of our experience, industry-proven tools and methods, technology and software vendor alliances, combining these with flexible transformational service delivery, operating support and managed services for finance, risk and actuarial functions, including on-site, near-shore, off-shore, and multisourcing. Part of our approach is to help ensure the entire RAOM transformation is designed and aligned with the insurer s vision, mission and strategic decisions and can be readily adapted to a client s individual situation and operating model setup. ABOUT THE AUTHORS Markus Salchegger is a managing director, responsible for Accenture Finance & Risk Services insurance in Austria, Germany and Switzerland. Based in Munich, Markus holds a PhD in Mathematics, and over the past 18 years, he has used his extensive experience in insurance, reinsurance, banking, asset management and software development to analyze, design and deploy solutions for risk management and financial service applications that help clients become high performance businesses. John Morley is a managing director, responsible for Accenture Finance & Risk Services insurance in the United Kingdom and Ireland. Based in London, John has over twenty years of international experience in the insurance and consulting industry. With his deep knowledge of risk and finance regulations, processes and systems he has led major risk and finance transformation programs from inception to completion, helping multinational insurers and reinsurers shape their vision to industry leading solutions and best practices. Fabiano Finotti is a managing director, responsible for Accenture Finance & Risk Services insurance in Latin America. Based in Sao Paulo, Fabiano is an Industrial Engineer, with an MBA in Finance and is a Project Management Professional from the Project Management Institute. For the past 15 years, he has been working with major banks and insurers conducting projects in the areas of enterprise performance management, costing and budgeting models, organizational/process redesign, project management office for large transformations, operational efficiency/cost reduction and IT systems renewal. Daniel Kimmerle is a senior manager with Accenture Finance & Risk Services, based in Munich. Daniel uses his vast experience in risk management and compliance to support insurers and reinsurers in analyzing, designing and implementing their risk management solutions and helping them comply with regulatory requirements and become high performance businesses. ACKNOWLEDGMENTS The authors would like to thank the following Accenture employees for their contribution to this document: Christoph Voß Andreas Herold ABOUT ACCENTURE Accenture is a global management consulting, technology services and outsourcing company, with approximately 319,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com. DISCLAIMER This document is intended for general informational purposes only and does not take into account the reader s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. STAY CONNECTED Accenture Finance & Risk Services: http://www.accenture.com/microsites/ financeandrisk/pages/index.aspx Connect With Us https://www.linkedin.com/groups/ Accenture-Finance-Risk-Services- 3753715?gid=3753715 Join Us https://www.facebook.com/ accenturestrategy http://www.facebook.com/accenture Follow Us http://twitter.com/accenture Watch Us www.youtube.com/accenture Copyright 2015 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 14-6319