adopting to the changing environment 1

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Adapting to the changingenvironment.Deloitte Central Europe Financial Services Industry Newsletter

October 2007

Financial Services Industry

Size matters: CEs biggest banks

Triggering the tax advantage

The shiting security paradigm


2/12

Contacts Welcome

The fnancial services industry in Central Europe is constantly changing. The companies thatwill survive and even prosper are the ones that can adapt to the changing environment

and thrive in the new surroundings. Challenges and opportunities abound: Solvency II, risk

management, IFCs and M&A are just a ew o the many topics keeping executives awake at

night.

In this, the 4th issue o Deloitte Central Europes Financial Services Industry Newsletter, we

continue our ocus on these emerging issues aecting banks, insurance companies, asset

management companies and other fnancial services players in the region. We also give a

glimpse at the results o the frst Central European Top 500 companies ranking However, as

usual, we also have some interesting global perspectives, including the results o the 2007

Global Security Survey.

I you would like to know more about how Deloitte can help you be successul in your

business, please contact one o our FSI partners shown in the let column. For a copy o any

o our publications, please speak to your local FSI partner or browse our local internet sites

which can be ound at www.deloitte.com

Mike JenningsFinancial Services Industry Leader

Deloitte Central Europe

Albania, Kosovo

Santiago Pardo

Tel.: +40 21 2075 492

E-mail: [email protected]

Bulgaria

Sylvia Peneva

Tel.: +359 2 980 8500


Croatia, Bosnia-Herzegovina,

Bosnia-Herzegovina Republic

o Srpska, Slovenia

Paul Trinder

Tel.: +385 1 2351 906


Czech Republic

Mike Jennings

Tel.: +420 246 042 576

E-mal: [email protected]

Estonia, Latvia, Lithuania

Veiko Hintsov

Tel.: +372 640 6512


Hungary

Andras FulopTel.: +36 1 428 6937


Poland

Marcin Zdral

Tel.: +48 22 511 0619


Romania, Moldova

Adrian Covacescu

Tel.: +40 21 2075 207


Serbia, Montenegro, Macedonia

Miroslav Toncic

Tel.: +381 11 361 2524


Slovakia

Zuzana Letkov

Tel.: +421 2 582 49 210



3/12

A landscape in evolution

While advising on the developmento International Financial Centres

(IFCs) over many years, we encounter

one particular persistent question: Is

there room or another IFC? Gener-

ally, we answer this with a counter

question: Do you think Paris should

move its fnancial services activity to

London, or perhaps the highly suc-

cessul centres o the Caymans and

the Bahamas should merge?

Behind our response is the thought

that, just as in every maturing in-dustry around the world, successul

strategies that are well-executed will

prevail, even under intense competi-

tion. In our view, there will always be

an opportunity to compete success-

ully, given an appropriate strategic

response. Deloittes latest thought

leadership on IFCs, A landscape in

evolution, attempts to explain why.

Over the past ew years there has been

a sea change in the intensity o competi-tion and speed o development in IFCs.

We may see another 40 or more centres

emerging in the next decade. However one

chooses to defne an IFC (see IFC or IFJ?),

there is clearly a very signifcant growth.

In addition, well-established centres are

constantly reinventing themselves through

improved capabilities and ocus.

A truly international basis of

competition is slowly emergingWe have observed an increasingly intense

international market rivalry emerging. The

enablers o this include:

Global consolidation o major fnancial

services institutions;

Global standardisation both rom im-

proved communication technologies and

the adoption o English as the dominant

business language; and

Greater mobility, both o labour (especially

good business, fnance and economics

graduates) and o capital.

Developing appropriatestrategies

The strategic vision must be brave,

tempered with reality

The essential questions or a country seeking

to build or enhance its fnancial jurisdiction

are: How should we develop these dimen-

sions o competition? And in which order?

Clearly, this depends upon the medium-to-

long-term vision and the startingpoint

(or assets) o the jurisdiction. Undoubtedly,such a vision must be brave and ambitious,

yet tempered with a great deal o reality

about how such a project can be realised

over the extended timescales. Experience

rom many other business liecycles tells us

that IFJs must aspire to be either regionally

dominant or niche in maturity, not stuck in

the middle.

Implementing the strategy

The key skill is change and pro-

gramme management

The ocus o this article is the development

o strategy. However, strategies cannot be

divorced rom their implementation. IFJs are

very large, complex and practical undertak-

ings which are ar harder to realise than

develop on paper.

The frst practical issue is winning agree-

ment and commitment to achieving the

long-term vision, and an understanding that

the time-to-maturity will be well beyond the

tenure o most o the key stakeholders and

investors. Building the appropriate govern-

ance and management models is imperative.

Here, small jurisdictions may have an advan-

tage o nimbleness and responsiveness.

To fnd out more about the uture or IFCs

and IFJs and what this could mean or your

business, download the publication www.

deloitte.cz in the Financial Services section.

IFCs are here to stay

IFC or IFJ?

The defnition o a fnancial centre is important because it determines how we think

about competition. We fnd the term IFC like oshore somewhat unhelpul in

that it connotes a single clustered, physical locality, with less ocus on those prerequi-

sites which orm the primary basis o competition; namely the political, legal, regulatory

and (to some extent) fscal dimensions o a fnancial jurisdiction. For this, we shall use

the term International Financial Jurisdiction (IFJ). This allows us to reer to both a large

geographically dispersed authority or to a restricted range o fnancial unctions as an

IFJ. Under this business defnition Dubai could compete with Poland, and British Virgin

Islands can compete with the whole o the United States, as o course they do. Also,

it encourages us to investigate intra-country competition such as between Beijing and

Shanghai, or London and Edinburgh. Finally, it allows us to use concepts o Cluster

Theory (e.g. around specifc fnancial skills), regional network eects (such as interna-

tionalisation o Central Securities Depositaries and Central Clearing Departments) ando the impact o local monopolies etc.


4/12

Global fnancial services institutionscontinue to be under pressure to

outperorm their competitors across

a range o challenges: rom risk man-

agement to regulatory compliance;

rom customer relationship manage-

ment to talent retention; and rom

mergers and acquisitions to inorma-

tion technology. However very oten,

eective tax management is over-

looked as a way to boost perorm-

ance in each o these areas.

This new report rom Deloittes global FSI taxteam looks at several key areas o a global

fnancial services institutions business,

uncovers how tax can play a role in creating

competitive advantage in each area, and

suggest ways in which these global fnancial

services institutions can quickly Trigger the

Tax Advantage.

How improvements in tax reporting,

technology and risk management

can contribute to optimised

performance

For companies where tax is an integral part

o the organisation, a well thought-out tax

strategy and risk management ramework

creates value at all levels o the business. It

also ensures that tax payments and flings

happen according to a well-defned process.

For some organisations, however, tax can

be something that just happens where

returns are fled, payments are made and

planning is undertaken, all o which is

divorced rom the rest o the business.

How can technology help?

The eectiveness o any technology as a risk

management tool relies upon the quality

o its inputs. As such, the tax sensitivity

contained in, as well as the ability to link

with, existing fnancial systems is critical.

While tax sensitisation o accounting

numbers should be handled by the tax

trained, the fnancial systems can be

designed to organise accounting numbers

into categories that Tax can interpret. In this

way tax technology can be considered as

a bolt-on to the fnancial systems.

Why good tax reporting is critical tomaintaining customer trust

A new ocus

No longer in the dark corners o a fnancial

institution, operational taxes are now under

a bright spotlight. New tax regimes, stier

penalties or non-compliance, and increas-

ing risks to the fnancial and commercial

well-being o the company these changes

have increased the importance o operation-

al taxes and, hence, the attention being paid

them. What needs to be at the top o man-agements agenda? An integrated ocus.

How companies can use tax credits

to secure signicant savings on IT

and R&D investments

Planning makes perect

The dierences among R&D tax regimes can

work in a companys avor with planning.

For a company to receive maximum global

R&D tax incentives, planners must start with

a consideration o how such benefts canaect, and be aected by, the companys

oreign tax credit positions, its international

tax liabilities, and its transer pricing ar-

rangements.

Why tax considerations deserve

a place in the deal

Tax A key consideration o any M&A

transaction

During this increased period o M&A activity

it is worth remembering that Tax issues need

to be careully considered as part o eachtransaction, whether it is in structuring the

deal at the outset or in the post-merger

integration phase. The beneft that Tax can

bring covers both above the line, as well as

below the line items.

How successful tax management and

implementation of tax technology

can stop deciencies from sabotaging

your Sarbanes-Oxley compliance

Tax is the number one cause o material

weaknesses or US flers and there is a lot

to learn rom the experiences o those that

have received an adverse opinion.

Why international assignments arekey to retaining your top performers

A recent Deloitte Research report on

oshoring in the fnancial services industry

revealed that the majority o institutions

suer rom oshoring atigue ater three

years in operations.

Financial institutions must fnd ways to man-

age a delicate balancing act creating pro-

grams that satisy young managers desires

or variety in their careers, while still making

it possible or them to keep work and lie in

balance. This balance is particularly difcult

when it comes to any frm that has overseas

operations in which the presence o U.S.

workers is necessary.

Why nancial institutions need to

integrate tax reporting into their

IFRS approach

By now companies have realized that there

are ewer ways to reduce the reported tax

rate, other than by permanently reducingthe cash taxes payable. Deerral doesnt

work; strategies such as retaining profts

oshore or deerring capital gains may save

cash tax but also require deerred tax plan-

ning to reduce the rate.

Compliance and systems

Create teams to fnd ways o improving the

data collection and calculations by automat-

ing, as ar as practical, the tax reporting

process. Automation can help in many ways,

such as tracking and calculating tax on share

options, revaluations, derivatives, and profts

retained oshore.

Tax orecasting and eective tax rate

management

To orecast taxes payable and reported tax

charges and to deliver meaningul data in

real time requires an investment in systems

(or headcount) above and beyond simple

business tools and structures. Companies

need to ocus on their eective tax rate to

get a clear understanding o post-tax profts

and, hence, earnings per share.

You can fnd more tax issues and solutions

in the Financial Services section at www.

deloitte.com.

Triggering the tax advantage

Tax tactics or the Global Financial Services Industry


5/12

For many years commentators have been

orecasting the arrival o European banking

mega mergers in some shape or orm. In

2005 Deloitte analysed the US mergers and

acquisition (M&A) experience and the Euro-

pean fnancial services market to identiy spe-

cifc M&A trends; these included the removal

o barriers and the imperatives o shareholder

value creation. We predicted that by 2010

M&A activity would indeed transorm the

European banking landscape.

According to a European Central Bank report

(Financial Integration, March 2007), rom

2000 to 2004 cross-border banking M&A

accounted or only 14% o all banking M&A

in the eurozone, but in 2005-2006 this

proportion increased to 38%, mainly due to

a ew large value transactions in 2005. The

report also identifed 33 banks with signif-

cant cross-border activities, which accounted

or more than hal o the eurozones banking

assets, and 16 o these banks were active in

at least hal o the eurozones countries.

Now in 2007, we can see how the increasing

number o actual and proposed transactions

combined with the more recent emergence

o Private Equity frms targeting the fnancial

services sector, is starting to change the Euro-

pean banking landscape. However, experi-

ence in other industries suggests the reality

o merger benefts is oten disappointing. It is

thereore even more critical or the manage-

ment o banks to identiy the major issues

that need to be addressed so that identifed

benefts are actually realised in transactions.

In this short pamphlet, we summarise our

view on the top 10 issues we believe are vital

or successul cross-border deals in banking,

we recap on our 2005 predictions in light o

the current European banking landscape in

2007, and we explore some o the realities

around achieving merger synergies.

Our conclusion on this matter is that an inte-

grated approach is needed, bringing together

all components o the transaction, so that

an operational plan is in place to help ensure

success rom Day 1.

To fnd out more about M&A in the banking

industry, download the report rom www.

deloitte.com or contact your Deloitte FSI

expert.

Integration is key

Mergers & Acquisitions in European Banking

10 key issues in the banking M&A

landscape

Investor attitude

Political and cultural barriers

Management structure and clear

accountability

Revenue benefts

Cost synergies

People

Technology integration

Tax pitalls and opportunities

Pensions

Regulatory, including capital


6/12

Top of the pile

The banking industry keeps growing

Industry

Ranking

Full name Country Assets 2006

(mln Euro)

1 Orszgos Takarkpnztr s Kereskedelmi Bank Rt. Hungary 28 389,7

2 eskoslovensk obchodn banka, a. s. Czech Republic 27 725,1

3 esk spoitelna, a.s. Czech Republic 26 491,8

4 Powszechna Kasa Oszczdnoci Bank Polski S.A., GK Poland 26 430,7

5 Komern banka, a.s. Czech Republic 21 733,2

6 Hansapank AS Estonia 19 392,0

7 Bank Pekao S.A., GK Poland 17 671,7

8 Bank Przemysowo Handlowy S.A., GK Poland 16 902,6

9 Skupina Nova ljubljanska banka Slovenia 14 408,8

10 BANCA COMERCIALA ROMANA Romania 14 027,3

11 ING Bank lski S.A., GK Poland 12 650,5

12 BRE Bank S.A., GK Poland 11 048,9

13 ZAGREBAKA BANKA d.d. Croatia 9 552,4

14 Bank Handlowy S.A., GK Poland 9 394,1

15 Bank Zachodni WBK S.A., GK Poland 8 624,4

16 Slovensk sporitea Slovakia 8 616,8

17 Kereskedelmi s Hitelbank Rt. Hungary 8 612,1

18 BRD GROUP SOCIETE GENERALE Romania 8 287,8

19 PRIVREDNA BANKA ZAGREB d.d. Croatia 7 585,3

20 HVB Bank Czech Republic a.s. Czech Republic 7 525,4

Deloitte Central Europe recentlypublished the rst edition of

the CE Top 500 a ranking of

the 500 largest businesses in the

region. The ranking, the result

of intensive cooperation between

the Deloitte ofces across 18

countries, also included a separate

analysis for the banking and

insurance sectors.

Here we have provided a short

summary of the results, together

with an analysis by Andras Fulop,

a Financial Advisory partner in

Deloitte Hungary who focuses on

the FSI industry.

The Central European banking sectorhad another very strong year in 2006: the

top 50 banks total assets grew nearly

by 22% in EUR terms, just slightly below

the previous years fgure. The increase in

net proft was just as impressive, with an

annual increase o 19% and 34% in 2005

and 2006, respectively. Average return on

equity was slightly over 20% in both years,

which is signifcantly higher than the similar

Western European fgure.

OTP Bank became the largest bank in

Central Europe based on total assets. Thiscan in part be explained by the act that

OTP is the only Central European banking

group, thereore its results include those

o its subsidiaries; urthermore, in 2006

OTP made several acquisitions which also

boosted its fgures.

The ranking shows clearly that the six

largest banking groups account or more

than 50% o all large banks. The Raieisen

Group has the most banks in the Top 50,

but these banks are mainly in the lowerpart o the ranking, due to their predomi-

nantly greenfeld background. Meanwhile,

Erste Bank has our banks in the top 25, all

o which were acquired through privatiza-

tion. Other large groups include KBC rom

Belgium, and Unicredit and Intesa rom

Italy.

With one o the last big banking privatiza-

tions in Central Europe, when the control-

ling stake o BCR was sold to Erste Bank in

2006, the Central European banking sector

is nearly ully privatized and only our banksout o the regions top 50 are still control-

led by the state. These our are also coming

rom just two countries Poland and Slov-

enia, while in the regions other countries

all o the big players are in private hands

by now. Privatizations are mainly eected

through strategic sale only one o the

top 50 banks, OTP Bank, is listed without

strategic owner. On the other hand, only

a limited number o the banks were truly

greenfeld operations.

Top 20 banks


7/12

Based on trends in the frst part o 2007,

growth is expected to continue in the

uture at double digits, although at a

slightly lower pace. The growth will be

owed to retail mortgage lending, as credit

market penetration in Central Europe is still

signifcantly lower than in Western Europe.

A urther shrinking in margins, increased

emphasis on ee income growth and en-

hanced cost efciency are also expected.

One should also note that at this stage, it is

hard to predict how the current subprime

stock market crisis will impact the Central

European banking markets. There is no

direct impact here, as the Central European

banks do not have or have very limited

direct exposure to these subprime securi-

ties. But on the other hand, there could

be several negative indirect impacts such

as potential increase in cost o fnancing,

increased deault rate in case o CHF and

EUR denominated loans through weaken-

ing o local currencies, lower valuation

levels o the ranked banks as well as their

investment portolios, etc.

Among the 50 biggest banks in terms o

revenue, the bulk (12) are Polish banks.

However, they dont top the rankings.

The situation is dierent when it comes

toinsurance companies, where PZU is

No.1 and hal o top 10 insurers are entities

based in Poland.

Industry

Ranking

Full name Country Gross Written

Premium 2006

(mln Euro)

1 Powszechny Zakad Ubezpiecze S.A. + Powszechny Zakad Ubezpiecze na ycie

S.A.

Poland 3 919,0

2 esk pojiovna a.s. Czech Republic 1 334,9

3 Kooperativa, pojiovna, a.s. Czech Republic 967,7

4 Zavarovalnica Triglav d.d. Slovenia 817,1

5 ALLIANZ Hungria Biztost Rt. Hungary 675,9

6 Towarzystwo Ubezpiecze na ycie Commercial Union S.A. + Commercial Union

Towarzystwo Ubezpiecze Oglnych

Poland 656,1

7 Towarzystwo Ubezpiecze Allianz ycie S.A.+Towarzystwo Ubezpiecze Allianz Polska

S.A.

Poland 653,4

8 Towarzystwo Ubezpiecze i Reasekuracji Warta S.A. + Towarzystwo Ubezpiecze na

ycie Warta

Poland 592,8

9 AEGON Towarzystwo Ubezpiecze na ycie S.A. Poland 473,5

10 GENERALI - PROVIDENCIA Biztost Zrtkren Mkd Rt. Hungary 468,6

Top 10 insurance companies

Criteria or the ranking

1. The data was collected in three categories: Companies, Banks and

Insurers.

2. The main category o ranking and the value which determine the

companys position in the ranking is revenues rom sale, assets and

gross written premiums respectively or Companies, Banks and Insurers.

3. The inormation was collected locally - preerably according to IFRS.

4. The ranking was composed o consolidated values (i the company

published consolidated fnancial statements).

5. The preerred source o data was audited fnancial statements, then

data provided to us by company and databases. I there was no

possibility o collecting the revenues or 2006, they were estimated or

assumed to be at the 2005 level.

Countries covered by the ranking

Poland, Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech

Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova,

Montenegro, Romania, Serbia, Slovakia, Slovenia, Ukraine


8/12

While inormation security incidents continueto grab the attention o business executives,

ownership o the underlying problems is

still perceived to rest with IT, according to the

2007 edition o the Global Security Survey by

Deloitte Touche Tohmatsu (DTT). Less than

two thirds (63%) o respondents to DTTs

2007 Global Security Survey have an inorma-

tion security strategy. Only 10% o this years

respondents have their inormation security

led by business line leaders. These fndings

support an emerging security paradox: the

gap between awareness o the problem and

support or the solution.

The survey also revealed that the greatest

root cause o external breaches continues

to be the human actor: an organizations

employees, customers, third parties and busi-

ness partners.

The contradictory fndings in this years

survey highlight the security paradox fnancial

institutions are acing, says Petr Brich, Risk

Management Leader or Deloittes Finan-

cial Services practice in the Czech & Slovak

Republics. On the one hand, it is clearthat respondents have identifed the major

security issues and the necessary actions they

must take to improve security and privacy

practices. On the other hand many fnancial

institutions are alling behind when it comes

to taking action.

One o the elements most worrisome or

organizations when it comes to breaches is

customers. The DTT survey ound that the

top three breaches (those that were repeated

the greatest number o times) were viruses

and worms; e-mail attacks, e.g. spam; andphishing/pharming. All o these breaches are

perpetrated via the customer, e.g. customers

as unwitting providers o sensitive inorma-

tion and conduits into fnancial institutions.

But even though fnancial institutions are

directly aected by these types o breaches,

they are still reluctant to take responsibility

or the security o their customers comput-

ers, most likely because o the enormity o

such an undertaking. When asked whether

they should be held accountable or protect-

ing the computers o their customers whodo online business with them, two thirds o

respondents (66%) replied that they should

not.

In addition to breaches perpetrated throughthe customer channel, the DTT survey reveals

that a high number o repeated occurrences

o breaches can be attributed to employees:

both misconduct (intentional action) and er-

rors and omissions (unintentional action). An

overwhelming majority o respondents (91%)

are concerned about employees and cite the

human actor as the root cause or inorma-

tion security ailures (79%).

But while errors and omissions on the part o

employees are identifed as a major security

issue, almost a quarter (22%) o respondentsprovided no employee security training over

the past year and only one-third o respond-

ents (30%) say their sta is well skilled

with adequate competencies to respond to

security needs.

Despite these gaps, identifying

the problem is at least half

the battle and so nancial

institutions are denitely moving

in the right direction to closethese gaps, adds Petr Brich.

Security training and awareness,

along with access and identity

management of employees, clients

and suppliers, and data protection

are among organizations top

initiatives this year, as they ght

to keep pace with the ever-

changing threat landscape.

Additional key fndings o the survey:

E-mail attacks top the list o external secu-

rity breaches fnancial institutions experi-

enced over the past 12 months (57%).

Two-thirds (66%) o respondents do not

eel they should be accountable or pro-

tecting the computer o customers who

bank on-line.

Virtually all respondents (98%) indicate

increased security budgets, but 35% eelthat their investment in inormation secu-

rity is lagging behind business needs.

Shiting priorities and integration

problems were identifed as top reasons

or inormation security projects ailure

(48% and 32%, respectively).

How much some things change. In the 2003

security survey, the DTT GFSI Group wrote,

There seems to be little insightul data on

the state o either IT security or privacy in

fnancial institutions - or any other sector

or that matter - and there is almost no data

2007 Global Security Survey

The shiting security paradigm

Europe, Middle East and Arica (EMEA):

The EMEA region has the highest per-

centage o respondents (39%) among

all regions who eel they presently have

both the required skills and competen-cies to respond eectively and efciently

to current and oreseeable security re-

quirements. Additionally, the majority o

participants (82%) eel that security has

risen to the C-suite or board level, with

more than three-quarters (77%) believ-

ing they have both the commitment and

unding to address regulatory compli-

ance. With regards to security breaches,

the percentage o institutions in EMEA

that experienced security breaches both

internally (31%) and externally (71%) is

above the global averages o 30% and

65%, respectively.


9/12

Regional highlight EMEA Global

FSIs who eel that security has risen to the C suite or board as a critical area o business 82% 81%

FSIs possessing a security strategy 61% 63%

FSIs whose inormation security strategy is led and embraced by line and unctional business leaders 10% 10%

FSIs who have incorporated application security and privacy as part o their sotware development liecycle 33% 32%

FSIs who eel they have both commitment and unding to address regulatory requirements 77% 73%

FSIs who eel that government driven security regulations are eective in improving security posture intheir industry

82% 86%

FSIs who have security linked to their IT security employees appraisals 44% 50%

FSIs who eel they presently have both the required skills and competencies to respond eectively and

efciently to oreseeable security requirements

39% 30%

FSIs whose employees have received at least one training and awareness session on security and privacy in

the last 12 months

82% 78%

FSIs who have an executive responsible or privacy 60% 66%

FSIs who have a program or managing privacy compliance 78% 70%

FSIs who have experienced repeated internal breaches over the last 12 months 31% 30%

FSIs who have experienced repeated external breaches in the last 12 months 71% 65%

that delivers a world-wide perspective.It is

an indication o the truly high visibility that

security and privacy has attained that this

statement is no longer the case.

How much some things stay the same. One

o the survey respondents to the 2003 se-

curity survey oered this statement, New

technologies and new business models are

causing us to blindly run ull speed toward

the unknown. And the hot breath o

threats and risk is on our necks at all times.

We are constantly under siege.This state-

ment is as true today as it was back then.

The everincreasing sophistication o security

breaches seems to know no bounds. The

industry has produced some great minds

- which have been used or us as well as

against us.

It has oten been said that, over the course

o a lietime, children are the source o

ones greatest joy and ones greatest con-cern. In a similar vein, this years respond-

ents might say the same o their people

(employees, customers, third parties and

business partners) - they are an organiza-

tions greatest asset yet its greatest worry.

The most requent breaches organizations

experienced were those perpetrated by

crooks against the customer. In addition,

a large number o organizations anticipate

breaches due to employees, both inten-

tional action (misconduct) and uninten-

tional action (errors and omissions). Even

though the majority o breaches are due

to mistakes and not malicious intent, they

have no less impact.

But mistakes are not without their use-

ulness. Sam Levenson, the American

humourist, once said, You must learn

rom the mistakes o others. You cant

possibly live long enough to make them

all yoursel.Humour aside, rom a security

and privacy perspective, the message is

clear: oten times, it takes misortune hap-

pening to others or us to learn what to do

to protect ourselves. You can be sure that

every time there is a major security disaster

reported in the press, many other organiza-

tions scramble to ensure that their systems

are not vulnerable in the same way.

Every year, this survey demonstrates the

progress in security that has been made

over the course o a year: the incidents o

viruses/worms, insider raud, and the leak-

age o customer data have all allen. We

know this doesnt mean that the criminals

are going away - theyre just thinking up

something new - but the statistic represents

major progress nonetheless. And much

o the progress has been as the result o

proactive - rather than reactive - measures.

Those o us in the security and privacy arena

know that the answer to the question, Are

we there yet? is that we may never be

there - but we continue to work towards

making sure that the journey is as sae and

secure as possible.

For urther inormation on the results o the

survey you can download it rom Financial

services section at www.deloitte.com.


10/12

Although the Solvency II project is still

in the early stages, QIS3 (Quantitative

Impact Study) is entering into a conclu-

sive/crucial phase. The outcome o the

study will aect the amount o capital

an insurance company must hold as

protection against potential risk.

In the ollowing paragraphs you can fnd

some o the key current developments in

the Solvency II project.

Quantitative impact studies

QIS3

The insurance companies were to submit

the completed spreadsheets to their local

supervisor by 29 June 2007

The results should be published in No-

vember 2007

Final advice on Solvency Capital Re-

quirement (SCR) and Minimum Capital

Requirement (MCR) to be presented by

spring 2008

QIS4

To be conducted in 2008 (probably be-

tween April and July)

Specifcation should be based on the

Framework Directive and should include

any lessons learnt rom QIS3

EC (European Commission) wants CEIOPS

(Comitee o European Insurance and Oc-

cupational Pensions) to deliver drat QIS4

specifcation by 20 December 2007

Problematic areas arising rom QIS3

Models

Lack o internal models

Signifcant eort oten necessary to

convert the existing models to adhere to

QIS3 rules

The problematic areas included

- Modelling o shocks on assets

- Modelling o reinsurance

- Modelling o interactions among assets

and liabilities in shock scenarios

- Determining run-o pattern (proxies)

- Split o liabilities into dierent categories

Options and guarantees (O&G)

O&G were not properly valued by most

companies

O&G were valued using very simple as-

sumptions/models in the majority o cases

In some cases, O&G assumed to be zero

Systems

Some o the current systems do not hold

enough inormation to perorm proper

QIS3 calculation

The lack o inormation identifed on both

asset and liability sides

Reporting procedures

Current procedures not ready or inorma-

tion required by QIS3

This relates to ability to fll individual inor-

mation and also to qualitative questions

The European Commission

The fnal drat o the Solvency II Directive was

published on 10 July 2007. All 13 currently

existing European Insurance Directives will be

combined into a single new one. The most

important innovation will be the risk-based

approach o Solvency II. The drat sets out

essential principles or the uture regime.

The development and testing o the Euro-

pean Standard Formula is very important or

the success o the whole project. Although

QIS3 meant big progress in this area, there

is still more calibration and testing needed

to set the Formula right. It is also necessary

to come up with suitable simplifcations or

small and medium-sized insurers.

Requirements o European Commission

to CEIOPS

Application o the proportionality principle

in the calculation o group solvency

Ideas to acilitate the eective supervi-

sion o groups and the supervision o the

group support in particular

Practical aspects to achieve consistent and

competitive equality across the EU concern-ing ull and partial internal models, govern-

ance requirements, systematic supervisory

reporting and public disclosure requirements

and the use o capital add-ons

Indicate where the line between level 2

implementing measures and level 3 guid-

ance should be

Core issues rom the Solvency II Direc-

tive drat

Pension unds are not included

The parts concerning the capital add-ons

are very general (concrete approaches to be

set by urther implementation measures)

The group supervisor will be assigned to

the (re)insurance group, (concrete ap-

proaches to be set by urther implementa-

tion measures)

The calculation o MCR will be set accord-

ing to the results o QIS3. It will have to

be calculated quarterly

Own Risk and Solvency Assessments

to be carried out by all (re)insurance

undertakings as an integral part o their

business strategy - a regular practice o

assessing their overall solvency needs with

a view to their specifc risk profle

Supervisory authorities have the power to

require an (re)insurance undertaking to

develop a partial or ull internal model in

the event that the SCR standard ormula

does not accurately capture the risk pro-

fle o that undertaking

Applications or internal models must be

approved or rejected within 6 months

rom receipt

Five tests to be met beore approval

internal model Use test; Statistical quality

standards; Calibration standards; Validation

standards and Documentation standards

All insurers must have an actuarial and

a risk management unction (access to the

required skills)

Solvency II

Changing behaviours

Tentative timetable or the Solvency II project

May 2008 Final advice rom CEIOPS on the frst two issues

2008 Final negotiations and agreement on the Framework Directive (beore the

next elections or the European Parliament)

October 2009 Fully consulted advice rom CEIOPS

2nd hal 2010 Adoption o the implementing measures and fnalisation o the level 3

supervisory guidance

2nd hal 2012 Start o the new regime in EU


11/12

Hot Issues

Our Financial Services Industry experts produce a wide range o thought leadership materials covering key issues or fnancial institutions.Below you can fnd selected materials that have been published in recent weeks.

More inormation on our recent FSI publications can be ound within our FSI section at www.deloitte.com.

Financial Services in 2010: Hallmarks o

success

The worldwide market or fnancial services

is evolving rapidly, and is likely to look very

dierent by the year 2010. This study rom

Deloitte Research identifes major market

drivers and operational challenges thatfnancial institutions will likely ace over the

next our years and pin-points the strategies

and practices recommended to create the

Hallmarks o Success.

Reversing the charges: mobile payments

at point o sale

Deloittes latest research suggests that the

substantial investment in mobile POS pay-

ments in the UK is misjudged, and there is

not a compelling case or banks or mobile

operators to invest in this new technology.Deloittes experts suggest alternative direc-

tions or mobile payment technology.

Lie insurance product innovation: a sure

path to growth

New products are one o the critical growth

strategies o most lie insurance companies.

A recent study o top lie insurers by Deloitte

revealed that the stock market rewards com-

panies that grow organically, especially those

who consistently develop innovative products,

while leaving unrewarded those insurers that

grow principally through mergers and acquisi-

tions. But how can your business develop

these new products?

The missing link: leveraging talent to

drive customer loyalty

In an era o soaring customer acquisition

costs and spiraling attrition, most retail banks

recognize the benefts o expanding share o

wallet by encouraging greater loyalty amongtheir existing customers. In recent years, many

retail banks have invested heavily in initiatives

designed to increase customer satisaction and deliver a unique ex-

perience. In most cases, however, these eorts have not borne ruit

- and noticeable gains in customer loyalty have remained elusive.

Why? To a great extent, retail banks have overlooked the linchpin o

the customer relationship - their customer-acing employees. These

employees oten remain an underutilized asset or growth, but in

this overview rom Deloitte, we explain how you can better utilise

these critical contact points with your customers.


12/12

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