insurance om
TRANSCRIPT
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The right combinationRethinking business operatingmodels in insurance
A Deloitte Research Study
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Foreword 1
Executive summary 2
The basis of competition has changed 4
Business operating models struggle to deliver in the new environment 8
Principles for a new business operating model 12
Practical steps towards a strategic approach 16
Conclusion 19
Notes 20
About this research
This report summarises the findings of a year-long study into the future of business
operating models (BOMs) in insurance. A business model is a blueprint of how
functions, divisions and organisations co-operate to capture shareholder value.1
The research primarily addresses the business model challenges of major global
insurance companies operating in both life or non-life sectors across multiple markets;although the findings are relevant for all insurers. The report is based on several
research methodologies including:
• Face-to-face interviews with senior insurance executives;
• An online questionnaire completed in August 2009 by approximately 20 equity
analysts in Europe and North America;
• Analysis of published year-end results (as at May 2009) of 24 international life and
non-life insurance companies from Europe, North America and Asia;
• Focus groups of in-house Deloitte insurance practitioners.
Our thanks are due to those senior insurance executives who enabled us to make an
in-depth analysis of their business operating models.
For notes on terminology see page 3.
Contents
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The right combination Rethinking business operating models in insurance 1
Deloitte’s research shows that insurance-industry analysts no longer give top priority
to revenue growth as the key driver of shareholder value. Balance-sheet strength and
robust risk management are, they say, the most significant drivers of performance.
In the medium-longer term, we consider operational efficiency will become crucial to
maintaining profitability, as insurers’ prospects for revenue growth are hampered by
increasingly saturated and commoditised core markets. Although certain retirementsegments and emerging markets offer a bright hope for revenue growth, it will be
some time before they are significant enough to shift the current focus away from
balance sheets, risk management and operational efficiency.
We argue that insurers’ existing business operating models are not designed to
achieve these new priorities. The predominantly multi-divisional and decentralised
models used by insurance companies have resulted in increased organisational
complexity, duplicated infrastructure and localised, difficult-to-scale operations.
In addition, the functions that have a direct impact on controlling balance sheets and
risk have had a diminished role under the prevailing models. And, as sources of new
revenues and customers have continued to shift from west to east, and from north to
south, insurers have struggled to put in place business operating models that cantranslate synergies across both mature and emerging markets.
Insurers should address these fundamental issues now. Building models that foster
standardised, enterprise-wide (globally) integrated operations is vital to compete in a
market differentiating through operational efficiency. However, local business units in
certain markets must also be allowed to be flexible in order to respond to dynamic
market conditions. We suggest ways to achieve a balance between these apparently
conflicting goals in this highly regulated sector.
Andrew Power Mark FitzPatrick Joe Guastella
Insurance Strategy Partner UK Insurance Leader Global Insurance Leader
Foreword
Over the past two years, many financial services institutions have beenworking towards one goal – survival. Like many others, insurers havecome under great pressure during the financial crisis. Compared totheir banking counterparts, most insurers have come through in good
shape.2 But ‘business as usual’ is unlikely in the foreseeable future.
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While demands on insurers have shiftedsubstantially, their business operating
models have not. Current models haveevolved to respond to opportunities forrevenue growth across multiple markets.
2
Shifting demand causes business model
challenges
While banks were, in the main, more severely affected,
the financial crisis knocked investors’ confidence in
insurance, and triggered a radical change in priorities
for the industry. Previously focused on revenue growth
and return on equity, insurance analysts have placed
balance-sheet strength, robust risk management and
operational efficiency at the top of their agendas.Such changes in investor demands are likely to remain
in place until 2012. At the same time, a changing
regulatory landscape is also expected to shift the goal
posts for insurers. For example, Solvency II is due to be
implemented in the European Union by 2012.
Additionally, insurance is in a period of global transition,
as major insurers shift strategies to straddle both
mature and emerging markets, requiring improved
global coordination.
While demands on insurers have shifted substantially,
their business operating models have not. Currentmodels have evolved to respond to opportunities for
revenue growth across multiple domestic and
international markets. These same models are now
creating barriers to more efficient operations, effective
balance-sheet and risk management and global
cooperation. In short, insurance business operating
models (BOMs) are often no longer fit for purpose.
Principles for new business operating models
We set out principles for a new business operating
model that will bring improvements to the management
of balance-sheets & risk and operational efficiency.
1. Globally integrated (or enterprise-wide)
operations: Existing models are set up for growth
opportunities in local markets, and insurers are
working towards creating regional-scale synergies to
achieve improved controls and operational efficiencies.
They must be more ambitious – driving through
fundamental change to go for integrated operations
on a global or enterprise-wide scale. The starting point
for each insurer is different. But typically insurers
should build stronger divisional and group/corporate
functions to facilitate such integration.
2. Dual operating model: Moving to a globally
integrated (enterprise-wide) solution may not beappropriate for all parts of the business as many
insurers are in a period of transition, straddling
mature and emerging markets. A dual operating
model is needed based on two speeds: accommodating
improved control and enterprise-wide scale where
possible, while allowing a localised tailored approach
for more entrepreneurial parts of the business (or
those subject to unique regulatory environments).
Being selective is key. Insurers should make a
distinction between those operations that should be
integrated (standardised and simplified to operate
from a globally integrated model) and thoseoperations which need to operate from a more
autonomous basis to retain flexibility and
responsiveness (e.g. diff icult-to-scale or highly
tailored processes).
3. The right combination: The dual model is not only
applicable for the emerging/mature markets
dichotomy. In defining the right mix of businesses to
be integrated or operated more autonomously, insurers
may choose to distinguish their core business in other
terms. Manufacturing versus distribution, commodity
versus higher-value business, back-office versus front-
office, life versus non-life, or indeed protection versus
savings and investment management can all be used
as a basis on which operations can be selected for
integration across the enterprise.
4. Strategic approach to building models:
Initiatives aimed at fixing current business models are
often thought up and implemented on a piecemeal
basis. This can result in initiatives that fail to gain
traction, leading only to incremental improvements
or ones that may do more harm than good.
Therefore a more strategic approach is required.
Executive summary
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The right combination Rethinking business operating models in insurance 3
Practical steps towards a more strategic
approach
Insurers seeking to transform their business models in
order to respond to the new demands placed on them
should take a more joined up approach to change.
Each organisation has its own unique business operating
model and starting point to the transformation agenda.
However there are common tools and steps to a solution:
• Often initiatives to change business strategy or
organisational structure are not strategically analysed
or driven in tandem. Insurers should assess the
current business operating model strategy and
structure so that the two are better aligned.
• Some insurers have struggled to convince
shareholders that their balance sheets are sound and
that new business is not being written at the expense
of disciplined underwriting. Balance-sheet efficiency
and risk management should be established as a top
priority, and relevant functional specialist teamsstrengthened.
• Business operating models have become more
complex and opaque as the boundaries between
insurance companies, intermediaries and distributors
become increasingly blurred. Open architecture is also
forcing strategic decisions around manufacturing or
distribution as a core capability. Defining core activities
(and non-core) is key to focussing resources on
achieving operational excellence in the essential parts
of the business. Non core activities may be outsourced,
offshored or delivered through strategic partnership.
• Many business units are accustomed to autonomy,
building their own solutions and product-sets tailored to
their local markets or jurisdictions. Consequently
insurance BOMs have typically become highly complex.
For improved operational efficiency and more consistent
governance and controls, insurers should simplify and
standardise processes, laying the foundations for
improved co-operation and scalable operations.
• Complex business operating models, led by
autonomous divisions, have caused duplication and
inefficiency. Simplified and standardised processes(see above) should be scaled up on an enterprise-
wide basis where appropriate. Insurance companies
can aim for enterprise-wide (globally) integrated
operations on a selective basis.
• Operational efficiency is crucial to competitive
advantage in commoditised markets. However
entrepreneurial units in either high growth products
or niche and emerging markets can be crushed by a
stifling business operating model. Within limits,
insurers’ models should allow specialised,
autonomous operations in certain parts of the
business.
• Some insurers were challenged by the financial crisis
partly because they failed to convince shareholders of
their financial viability. This was in part caused by a
lack of enterprise-wide transparency and difficulty in
communicating business models, reporting and
accounting. Insurers should clearly articulate the
business operating model and strategy to external
stakeholders.
Terminology
Balance-sheet efficiency and risk management: strategies and structures concerned with
capital, liquidity, and the governance and control of risk.
Business models: a blueprint of how functions, divisions and organisations co-operate to
capture shareholder value. Throughout this report, the terms ‘business model’, ‘business
operating model’ (BOM), ‘operating model’ and ‘global operating model’ are used
interchangeably. However there are small d ifferences in usage. ‘Business models’ (the most
all-encompassing term) typically refers to high level strategy. BOMs are applied versions
encompassing strategy and operations. Operating models have a more operational focus.
The crisis: the financial crisis that began in August 2007.
Long term: a medium-to long-term view for investment analysts is defined as between one
and three years.
Operational efficiency: variables that have an effect on operating margins, such as cost
efficiency, customer acquisition and management costs, tax, claims management.
Revenue growth: includes growth in premium income from new business and customer
retention (persistency), policy volume, price realisation, and investment and trading returns.
Divisions: business units organised by customers, products or geographies.
Functions: in contrast to divisions, functions are typically categorised by the competencies
of the activities carried out. For example, sales and marketing, tax, risk, finance, IT or
underwriting.
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The financial crisis knocked investors’ confidence in
insurance, triggering a radical change in priorities
for the industry. Previously focused on revenue
growth and return on equity, insurance analysts
have placed balance-sheet strength, robust risk
management and operational efficiency at the top
of their priorities. These revised priorities will
remain in place until at least 2012. We argue that
these changes to the basis of competition willrequire insurers to adjust their business models.
Balance-sheet strength and risk management
are top priorities
The financial crisis, beginning in August 2007, triggered
a worsening in the performance of insurers. Based on a
sample of 24 global firms, insurers’ total revenues
(including investment and trading net income) slumped
by 32 per cent in FY08. The severity of the decline was
particularly felt by insurers exposed to investment
losses. At the same time, operational efficiency
decreased, with the average combined ratio for thesample increasing by two percentage points to 91.8 per
cent.3 In addition, some 78 per cent of insurers saw a
drop in their capital and solvency levels during FY08,
driven primarily by losses on the asset side.
This broad-based deterioration in performance,
together with high-profile shocks (such as that
experienced by AIG), led to a widespread loss of
investor confidence. The industry struggled to convince
stakeholders that their businesses were viable, but value
was very quickly destroyed. In FY08, the total market
capitalisation of our sample of firms plunged 30 per
cent (from £630.6 billion to £443.8 billion).4 Embedded
value (EV) has also been adversely affected.5
With investor confidence severely knocked,
shareholders radically shifted their priorities. Our survey
of European and North American insurance analysts
shows that shareholder priorities moved markedly
between 2006 and 2009 (see Figure 1). Analysts were
asked to rank the medium-to long-term (1-3 years)
performance criteria they use to judge insurance firms.
In 2009, balance-sheet & risk management scored
97 per cent, compared with just 43 per cent for
revenue growth (see Figure 1).6
Is this new priority simply a knee-jerk response to a
credit crisis that may already be over?
Some senior executives that we interviewed think so.
However, analysts remain sceptical, and balance-sheet
efficiency and risk management will remain their central
focus until 2011/12. Some 50 per cent of insurance
analysts indicated that their concerns over balance-
sheet and risk management will remain at a high leveluntil at least 2011.
Longer-term trends seem to support the analysts’ views.
Regulations and accounting rules covering capital,
liquidity and risk are currently being revised and will
keep the balance-sheet agenda in place, for some time:
• In Europe, the EU’s Solvency II legislation, which aims
to establish more efficient economic capital models,
is due to be implemented by 2012. The spirit of the
Solvency II Framework Directive may be liberating,
allowing businesses to benefit from harmonisedregimes on a supranational basis. The principles of
Solvency II are also expected to have an impact on
insurance players operating in the US and Asian
markets as many European firms are active there.
• The capital required to write new business is likely to
remain scarce and expensive. This is leading some
insurers to more efficiently source capital from
internal sources. As many corporate structures are
sub-optimal in terms of their capital efficiency,
fungibility and diversification, leading insurers have
been restructuring their legal frameworks and
balance sheets, reducing risk and improving their
dynamic capital modelling. For example, several
groups over recent years have moved to a single EU
carrier (one for life and non-life) operating across
Europe through a branch structure.
• Modifications to accounting rules, and frameworks
that seek to improve comparability and transparency
(such as International Financial Reporting Standards
(IFRS) and Market Consistent Embedded Value
(MCEV)) are also being implemented over a similar
time frame.7
The basis of competition has changed
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The right combination Rethinking business operating models in insurance 5
Operational efficiency will be the top priority in
the longer term
While capital, liquidity and risk issues have become vital
factors, business strategies must also take into account
another fundamental shift towards operational
efficiency. Among our sample of global insurers, total
revenues in 2008 dropped by more than 30 per cent
from the preceding year.8 Figure 1 also illustrates
insurance analysts’ priorities for 2012 and beyond.Revenues will become important once more, but
operational efficiency will be king.9
The convergence of several regulatory events is likely to
constrain revenue growth going forward:
• Tighter regulation of the distribution of insurance
products (such as MIFiD in Europe and the Retail
Distribution Review in the United Kingdom) may act
as a brake on new business development in these
markets, potentially curtailing profitability.10
• Legislation on capital requirements may also hold
back growth. Solvency II was heralded as offering
opportunities to make capital models more efficient
across jurisdictions. However, recent proposals to
implement the framework directive may be
interpreted in such a way that regulations may
inhibit writing new business in certain markets.
One way around this potential problem of regulatory
capital may be to restructure the group to become
a ‘mega insurer’ with branches in each market.11
• Additionally, as Solvency II and other risk- and
capital-based initiatives are being implemented,
insurers are achieving greater understanding of
the real costs of underwriting risks. Products that
are less capital-efficient may be withdrawn as more
emphasis is given to disciplined underwriting and
sustainability.
Such events suggest capital planning will remain
important but also add to the likelihood that the long-
term focus on operational efficiency will be the principal
source of profitability.
Figure 1. Change in insurance analysts’ priorities pre- and post- credit crisis (2006, 2009, 2012)
Insurance analysts’ priorities 2006
Insurance analysts’ priorities 2009
Priority Score (out of 100)
Priority Score (out of 100)
0 20 40 60 80 100
Other
Manage external
expectations
Balance-sheet &
risk management
Improveoperational
efficiency
Grow revenue/ income
0 20 40 60 80 100
Other
Grow revenue/ income
Manage externalexpectations
Improveoperational
efficiency
Balance-sheet &risk management 97%
81%
79%
76%
56%
66%
43%
52%
26%
23%
Insurance analysts’ priorities 2012
Priority Score (out of 100)
Source: Deloitte Research, 2009
0 20 40 60 80 100
Other
Manage externalexpectations
Balance-sheet &risk management
Grow revenue/ income
Improveoperational
efficiency84%
74%
64%
52%
23%
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Revenue growth will remain important, but the
focus may change
Management in insurers will, of course, focus on both
revenue growth and operational efficiency in their
medium-term plans, with the balance varying by firm.
Figure 1 shows that by 2012 insurance analysts will
consider revenue growth as an important driver of
shareholder value once more. However, we expect that
the focus of revenue-related activities may need tochange in the light of developments in mature markets.
Our analysis of revenues suggests that, up until the
financial crisis, total revenue growth has been sluggish
due to dependence on saturated mature markets, and
revenues have been supported by investment returns.
We think the focus for revenue-generating activity may
shift to improving customer retention (‘persistency’ in
life companies) as new customer acquisition becomes
more difficult for the following reasons:
• Long-term total revenue trends indicate sluggishgrowth. Total revenue growth has been unimpressive
over the past five years. Total revenues are calculated
from net premiums, reinsurance premiums, and
trading & investment income. Over the period
between 2005 and 2009, (projecting forward from
2009’s first-half results), global insurers achieved total
revenue CAGR of just 1.31 per cent (see Figure 2).
Separating out net premium growth, insurers
achieved a CAGR of just 4.56 per cent over the same
period. Both rates are indicative of saturated markets.
• Revenue growth has been supported by
investment returns. Net premiums contributed
approximately 55 per cent of total revenues in
2005-2007. This indicates that investment and
trading income have played significant roles in
holding up headline revenue growth. However,
heavy investment losses in 2008 ate into total
revenue growth even when net premiums remained
stable. Many industry commentators do not expectinvestment income to deliver sufficient returns to
maintain total revenue growth and profitability in the
coming years.12 In a more risk-averse environment,
we think that insurers may revert to average
investment returns.
• Insurers are often reliant on core markets that
are saturated. An analysis of income generation
(see Figure 2) and the location and value of assets
indicates that insurers have reached saturation in
many core markets. Among our sample of 24 global
insurance companies, an average 88 per cent ofgroup assets was based in mature markets in 2008.
At the same time, macro-economic expectations are
downbeat about growth potential in mature
economies. This means that net premium income is
unlikely to grow at a rapid rate in the coming years. 13
Figure 2. Global insurance firms’ revenues, 2005-2009
Total revenues
GBP(£) (000s)
GBP(£) (000s)
Net premiums
Note:Total revenues, sometimes known as ‘total income’, includenet premiums, investment and trading net income and otherincome streams. Based on a selected sample of 24 global insurers.
Note:Net premiums are a subset total revenues.Based on a selected sample of 24 global insurers.
Source: Deloitte Research, 2009
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2009 E2008200720062005
605,060 617,917 617,785 629,213
422,852
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
2009 E2008200720062005
291,730309,881 318,836
348,684369,429
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The right combination Rethinking business operating models in insurance 7
• Emerging markets are expected to grow at twice
the pace of developed markets.14 Emerging markets
offer a bright hope as a source of revenue. However,
with a few notable exceptions, emerging-market
operations make a much less significant contribution
to overall group performance compared with mature
markets. For instance, among our sample of
24 insurers, the emerging markets’ share of total
revenues stood at 19.1 per cent in FY 2008.Their share of total assets was just 12.1 per cent in
the same year. Emerging markets are likely to remain
a minor contributor to revenues, compared to
mature markets, for some time to come.
Insurers’ scope for revenue generation in mature highly
saturated markets may be limited. In their life business,
they may rely on achieving growth in the value of their
current assets under management (AUM) as growth
through new business becomes difficult. The need to
refocus efforts on retaining customers may take
precedence over new business acquisition and revenuegrowth. For these reasons, our sample of insurance
analysts identified ‘minimising lapses/surrender rates’
and ‘growing the value of AUM’ as the main areas of
insurers’ customer focus over the next few years.
Insurance analysts have refocused onbalance-sheet strength, robust riskmanagement and operational efficiency.We believe these concerns run deeperthan a short-term reaction to the dentedbalance sheets and revenues of 2008.They also reflect longer-term trends thatshow insurers’ markets are maturing andthat regulation is changing thelandscape. Insurance companies mayneed to update their business operating
models to reflect the fact that theirmarket is in transition.
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While demands on insurers have shifted
substantially, their business operating models have
not. Current models have evolved to respond to
opportunities for revenue growth in a variety of
markets. These same models are now creating
barriers to more efficient operations and effective
balance-sheet & risk management.
Based on in-depth interviews with senior insuranceexecutives and in-house focus groups of Deloitte
practitioners, many insurance BOMs are struggling to
be fit for their purpose.
‘Adaptive’ multi-divisional models dominate
No two BOMs are the same, and distilling complex
business strategies into summaries can be misleading.
However, our research suggests that insurers’ business
strategies are typically ‘adaptive’.16 This means that they
seek competitive advantage through the slick entry into,
and exit from, markets. They rely on speed, timing and
the flexibility of the model to respond to growthopportunities at the local level. Within parameters set at
group/corporate level, each business unit typically sets
its own strategy and tactics to respond to local market
conditions.
To execute adaptive strategies, insurers’ organisational
structures are typically based on highly autonomous
revenue-generating units that are operated discretely
within a decentralised decision-making framework.
Their characteristics include:
• Divisional decision-making. Divisions typically take
responsibility for their own profit-and-loss account
and set their own agendas. As they are operateddiscretely, each division has a significant support
infrastructure of its own. Divisional heads (of product
lines, countries, or customer segments) hold key
decision-making rights rather than the heads of
functions (such as claims, actuarial, marketing,
underwriting or loss adjusting). There are, typically,
many layers of geographic, product and customer-
based divisions within one reporting structure.
• Divisions operate discretely from each other.
Unintegrated divisions facilitate the bolting on or
unbolting of individual business units, acquisitions ordisposals. This allows insurers to grow or shrink
according to revenue opportunities.
• Decentralised operating structures. Insurers
typically favour lean group or corporate functions.
Such functions manage business units on a portfolio
basis. They set financial performance metrics but do
not become strategically, tactically or operationally
involved with the running of the business units.
There are differences in different regions. In the
United States, corporate (group) functions may be
sub-divided into domestic and international divisions.
In Europe, this layer is rarely present.
Business operating models struggle to deliverin the new environment
“We have literally thousands of ITsystems that are not linked together.”
Global life insurer
“This industry is littered withunconsummated M&A.”
Global general insurer
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“Marketing was a case in point. It was the least mature of our functions,lacking the basic tools and programs and was organised on a country-by-country (local) basis. It was on an individual and basic level.No segmentation and proposition strategies had been developed.
This was banking 15 years ago – with no functional expertise. But itwas tackled by banks back then. It is still a big issue in insurance.”
Global composite insurer
Disadvantages of ‘adaptive’ multi-divisional models
Five specific issues can be created by these models:
1. Limited governance and controls: The consistent
management of risk and capital can be weakened within
divisional decentralised models. Without a strong group
function (or strong functional specialist teams), the
influence of subordinated control functions – such as risk,
compliance, underwriting and finance – can be diluted.
Specialist knowledge in these areas can be lost.
2. Duplication of infrastructure: Autonomous divisions
with their own independent infrastructures can produce
significant duplication of IT, processes and functions in a
decentralised, adaptive multi-divisional organisation.
Few incentives exist for divisions to work together to
create common processes. Large acquisitions can create
significant issues if not properly integrated.
3. Limited co-operation due to ‘divisional bargaining’:
Strong divisions combined with weak functional teams can
lead to poor co-operation. Divisions that must ‘bargain’
with each other can create barriers to co-operation leading
to inconsistent (non-standardised) processes. This can lead
to IT systems that struggle to be integrated and that have
no common language, which can negatively impact
operational efficiency.18 It can also lead to a lack of
cooperation in serving shared customers.
Without centralised functions to facilitate such
co-operation, insurance companies can fail to utilise
shared services (across divisions or functions) in order
to achieve economies of scale or other synergies.
Insurers have significantly greater IT and M&A legacy
issues than other industries.19
4. Lack of mobility of staff, skills and innovation:
Divisions acting autonomously can stifle the global
movement of skills, ideas and leading practices. Specialists
in one part of the business may struggle to share their
functional specialist skills if there are barriers to mobility.
5. Added complexity: In the face of weak centralised
governance, insurance companies have put in place various
forms of matrix management to forge greater co-operation
between divisions. This has improved co- operation
across divisions. But it has also led to confusion over
roles and responsibilities, competing strategies, furthercosts and issues falling between the gaps.
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The right combination Rethinking business operating models in insurance 11
Figure 4. Business operating models. The maturity lifecycle in insurance.
Strategy
Environment/
development
stage
Mature or
stable
Complex, fluid
established
Centralised control
Regional integration/ strong controls forregional synergiesLow integration of divisions
for adaptability
High integration of local functions
for responsiveness
Decentralised control
Local control
Structure
Emerging
or fluid
2 – Adaptive business strategy1 – Entrepreneurial/integrated
business strategy
1 – Functional operating structure 2 – Multi-divisional operating structure 3 – Multi-divisional with regional
functions
3 – Planned business strategy
Source: Deloitte Research, 2009
1. Entrepreneurial and functionallyintegrated models: The first phase isbased on an entrepreneurial strategy,
growing in either a single country orproduct market and built aroundfunctions reporting to a centralisedpower (the CEO).
2. Adaptive multi-divisional: Then themodel expands outside the domesticmarket to become multi-divisional(often creating a replica of the existingbusiness unit) with decentralisedoperations (at the group level) basedon product lines or countries.
3. Planned multi-divisional: the multi-divisional structure is complemented bystrengthened and regionalisedfunctions, and by stronger group/ corporate functions seeking to moveto regional scaled operations inorder to deliver wider synergies.
Maturation (phases) of an organisation
‘Regional ‘planned’ models have emerged
Our research suggests that some insurers have evolved
beyond the adaptive, multi-divisional model. These
companies remain multi-divisional, but they adopt a
‘planned’ business strategy. To execute planned strategies,
insurers need more centralised control and strengthened
functions that are scaled to national or regional size.
In addition to the business-based imperatives to regionallyintegrate (i.e. to gain scale and efficiency); regulatory,
financial and tax-based initiatives are also facilitating a
drive to regionalise business operating models.
For instance, legal frameworks in Europe are working to
facilitate corporates in their move to a region-wide business
model through harmonising legislation. Such legal and tax-
based developments impacting corporate legal structures
can facilitate simplified and standardised processes.20
We have found that global insurers based in Europe are
typically more internationally diversified and further down
the road in using planned strategies than Anglo-Americaninsurers. However, regardless of location, most insurers
we interviewed are moving slowly towards more planned
business operating models.21
Figure 4 illustrates how some insurance business models
have moved into this development phase, with
regionally integrated operations, stronger centralisation
and a planned strategy.
Although insurers may suffer increased short-term
management costs and bureaucracy, moving to a
regional model has several advantages. It allows for
cooperation among divisions at the continental levelenabling standardised approaches and regional-sized
economies of scale. Many insurers are de-duplicating
localised infrastructure moving towards regional hubs of
shared services. Regional models can also give region-
wide representation of functions and controls.
Are insurers being radical enough in re-designing
their BOMs? Simply regionalising their existing
operations is not enough. To respond to the new
shareholder demands for balance-sheet strength,
global enterprise-wide controls are required,
functions should have greater influence overdivisions, and group control should be stronger.
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Insurers seeking a strong early position coming out of the crisis will need to meet the
challenges posed by their business operating models. This section sets out principles
for a new business operating model that will bring improvements to the management
of balance-sheets & risk and operational efficiency.
1 Globally integrated (or enterprise-wide) operations: Existing models are set up for
growth opportunities in local markets, and insurers are working towards creating regional-
scale synergies to achieve improved controls and operational efficiencies. They must be
more ambitious – driving through fundamental change to go for integrated operations on a
global or enterprise-wide scale. The starting point for each insurer is different. But typically
insurers should build stronger divisional and group/corporate functions to facilitate suchintegration.
2 Dual operating model: Moving to a global integrated (enterprise-wide) solution may not be
appropriate for all parts of the business as many insurers are in a period of transition,
straddling mature and emerging markets. A dual operating model is needed based on two
speeds: accommodating improved control and global scale where possible, while allowing a
localised focus for more entrepreneurial parts of the business (or those subject to unique
regulatory environments). Being selective is key. Insurers should make distinctions between
those operations that should be integrated (standardised and simplified to operate from a
globally integrated model) and those operations which need to operate from a more
autonomous basis to retain flexibility and responsiveness (e.g. difficult-to-scale or highly
tailored processes).
3 The right combination: The dual model is not only applicable for the emerging/mature
markets dichotomy. In defining the right mix of businesses to be integrated or operated
more autonomously, insurers may choose to distinguish their core business in other terms.Manufacturing versus distribution, commodity versus higher-value business, back-office
versus front-office, life versus non-life, or indeed protection versus savings and investment
management can all be used as a basis on which operations can be selected for
integration across the enterprise.
4 Strategic approach to building models: Initiatives aimed at fixing current business
models are often thought up and implemented on a piecemeal basis. This can result in
initiatives that fail to gain traction, leading only to incremental improvements or ones that
may do more harm than good. Therefore a more strategic approach is required.
Principles for a new business operating model
1. Globally integrated (or enterprise-wide)
operations: choose your markets and globalise
Progressing towards global integration (rather than national
or regional integration) makes sense for a host of reasons.
For instance, improved balance-sheet and risk management
requires centralised and globally integrated functions to
create a consistent global view of risk and capital. Regional
views are helpful – especially as legislation is beginning to
converge at the regional level, as with Solvency II. But onlyglobal integration will suffice if multinational insurers are to
achieve enterprise-wide control. Capital and risk models
should be congruent with operations.
Leading insurers, seizing their chances while the
landscape settles, are aggressively scaling up their
operations. They are picking their markets, and seeking
to win with the advantage of global scale. For instance,
some leading manufacturers are seeking to develop a
single manufacturing platform on a continent-wide
basis.
To overcome business-model barriers and move to a
more globally integrated operating principle, three steps
need to be taken:
• Create a stronger group/corporate centre to
counterbalance divisional power. Strengthened global
financial control and risk governance require group-led
functional communities with the power to influence
practices in divisions. A more centralised approach
should also facilitate co-operation between
traditionally autonomous divisions.
• Led by the group/corporate-level functions, insurers
should seek to further ‘industrialise’ (that is, to simplify
and standardise) processes within divisions and
functions, leading to potential shared services.
• Then they must integrate divisions and functions at
both the regional and global level in order to achieve
scale.
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The right combination Rethinking business operating models in insurance 13
2. Dual operating model: allow flexibility for a
tailored response
The guiding principle of global (enterprise-wide)
integration must not be implemented at the expense of
flexibility. Insurers require gains in efficiency and
customer retention in mature markets while they need
revenue growth in emerging markets. As global
operating models mature, insurers should seek to move
from their adaptive multi-divisional models to anacceptance of a new structure based on a dual model.
It is not practical for some business units to be subject
to prescriptive organisational structures or to initiatives
designed to create scale efficiencies at regional or global
levels. For instance, business units competing in
emerging markets, where the customer/client base may
be unfamiliar, often need to spend time and resources in
building relationships with new customer segments and
developing appropriate underwriting and pricing
policies. In new markets, sales, claims, actuarial and
underwriting teams need to work together to establishcustomer segments, risks and pricing. Only once they
have matured should they be separated out to join
regional or global shared-service platforms.
Other operations may also need to be treated
differently. Business units in mature markets seeking to
place new products, for example, or those subject to
highly nuanced local regulation may also suffer under a
globally integrated regime.
Insurers spanning markets that require these different
kinds of approach need a BOM that fosters global
operations where possible but that also helps
entrepreneurial units to reach maturity.
Such a dual operating model should be based on three
principles:
• Selectivity: Insurers should be selective as to which
operations go into regionally and globally industrialised
models. These decisions should be based on objectives,
legislative requirements (including tax) and the
maturity of each business unit.
• No compromise on enterprise-wide control:
Categorising specific units as entrepreneurial is not a
‘get-out-of-jail-free’ card for the local business unit.
The need for global capital allocation remains.
Localised divisions and functions should be set minimum
standards, but be free to organise according to specific
market conditions. As they mature, these units should
be brought into the global operating model.
• Global (group or corporate level) support for local
units: Entrepreneurial units may still tap into global
manufacturing capabilities. Providing platform supportfor local units will work if the platform allows such
units to be responsive to local conditions and
customers. It is necessary to understand which
processes should be common across business units
and which need to be tailored. As insurers regionalise,
these business units should be increasingly supported
and managed by regional hubs.
As global operating models mature,insurers should seek to move from theiradaptive multi-divisional models to anacceptance of a new structure based on adual model.
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Another way to categorise activities is based on the
back, middle and front offices within business units.24
Insurers’ back-office, support and control functions
have often been structured around the front office.
This has led to a lack of control and a lack of
standardised processes within middle and back offices.
At the same time, a wholesale move to standardised
controls in every office, and in all functions and
divisions, may be costly and impractical.
Commodity areas such as protection and motor may
benefit from a focus on achieving scale. By contrast, in
higher-value areas (such as global commercial lines)
the key is to have appropriate client-related data-
sharing, risk management and control. The gain or loss
from the underwriting decision in such cases can
swamp any operational efficiencies. Globally integrated
scalable models should not be adopted by business
units where they result in diseconomies of scale
Figure 5 plots the next phase for global operating
models – progressing from a regional business
operating model to a dual model.
3. The right combination. Dual models are not
just about emerging markets
The dual model approach is not only applicable in
thinking about the emerging market/mature market
dichotomy.
The principle can be applied to manufacturing and
distribution.22 Leading insurers who have decided that
manufacturing is a core competence are seeking to
globalise their manufacturing processes. Due to the
multi-divisional approach taken by most insurers, global
manufacturing may be combined with global
distribution only for certain commoditised personal
lines. For instance, creating global direct motor
operations may be possible. Those who deem their
distribution to be ‘core’ may seek advantage in
disintermediating brokers and aggregators from theirdistribution processes as a way to preserve margins.23
Figure 5. Business operating models: Dual models
Strategy
Local model National model Regional modelNext generation
dual model
Environment/
development
stage
Transitional:
Mature &Emerging
Selectivecentralisedcontrol
Global integration/strong controls for
global synergies
Migrate as
unit matures
Global support
platform
High integrationof local functions
Regional integration/ strong controls forregional synergies
High integrationof local functionsfor responsiveness
Decentralised control
Centralised control
Local control
Structure
Matureor stable
Complex,fluidestablished
Emergingor fluid
2 – Adaptivebusiness strategy
1 – Entrepreneurial/ integratedbusiness strategy
1 – Functionaloperating structure 2 – Multi-divisionaloperating structure 3 – Multi-divisionalregional functions4 – Global divisions andfunctions. Local functions
3 – Plannedbusiness strategy
4 – Selective plannedbusiness strategy
Source: Deloitte Research, 2009
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The right combination Rethinking business operating models in insurance 15
Insurance (that is, protection) or savings and
investment management is another basis for
distinction. As some life insurers’ businesses move more
towards investment management, the control of
investment performance (providing downside
protection), grows in importance. That magnifies the
significance of controlling hedging and investment in
illiquid instruments. A variety of measures can be
adopted – from merely setting policies (around riskappetite, for example, or the level and return of
investment spend) to more active control of decisions
(as with large catastrophe risks).
4. Piecemeal change to make way for strategy
Insurers have recognised that their current BOMs are
struggling to deliver operational efficiency and effective
control. Many are working feverishly to fix some of the
problems. But change has been piecemeal and the impact
only incremental and may, in some cases have done more
harm than good. Based on our interviews with senior
insurance executives, the sidebar highlights some of theinitiatives currently underway in leading institutions.
• Adjusting their global footprint, either to exploit
emerging-market growth or to create regional or global
synergies.
• Consolidating divisional operations (by geographies,
product lines or customer segments).
• Reviewing functions in order to understand which can be
shared, consolidated, offshored, or outsourced.
• Standardising operational activities to allow for greater
use of IT and common processes across divisions andfunctions.
• Reorganising group/enterprise teams (by, for example,
redefining decision rights) to create more effective
centralised functions.
• Developing new strategies to optimise the deployment
and retention of critical talent.
Source: Deloitte Research, 2009
There are many and various skill-setsinvolved in BOM changes. Risk andactuarial teams need to help createdynamic capital models that workefficiently; HR, IT and other functionsare required to work together for acultural change in operations bothwithin and across divisions; while legal
and tax teams have to facilitate changesto the underlying structure of BOMs.
There are many and various skill-sets involved in BOM
changes. Risk and actuarial teams need to help create
dynamic capital models that work efficiently; HR, IT and
operations are required to work together for a cultural
change in operations both within and across divisions;
while legal and tax teams have to facilitate changes to
the underlying structure of BOMs.
Few insurers have a co-ordinated strategy for theseinitiatives. And this can cause problems. For instance,
it is possible to implement an extensive and costly IT
programme that fails to put in place the people strategy
that is required to execute and embed the programme.
Such initiatives can also fail to achieve the necessary
commitment from business units due to the weak
influence of group functions.
Figure 6. Insurance firms’ business-model initiatives, 2009
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Insurers should take a more co-ordinated approach
to change and re-appraise current BOM change
programmes. Moving away from uncoordinated
piecemeal initiatives to a more strategic approach is
required. Globalising and industrialising operations
designed to gain scale must be carried out on a
selective basis. With this selective principle in mind,
insurers should take the following steps to
transform their business operating models:
1. Assess the current business operating model
strategy and structure
Often initiatives to change the business operating
model are not strategically analysed or driven in
tandem. This can result in business strategies that
are misaligned with the organisational structure.
Articulating the strategy and then making decisions
about the BOM requires several stages:
• Assess the insurance value chain. Which parts
are most valuable? Open business modelsare becoming crucial for strategic positioning.25
For instance, decisions made about the role of
intermediaries, the use of aggregator sites and
product sourcing through open architecture all
have consequences for the business model.
• Business strategy and the operating structures
required to execute it should be aligned – for
instance, corporate strategy should reflect the growth
prospects of markets and the need to focus on
customer retention (persistency) in mature markets.26
• Assess if the current business operating model is
appropriate. Many insurers struggle to define the
BOMs they currently have, let alone in the future.
They should check their existing model for gaps in its
ability to deliver the new strategy.
2. Address balance-sheet efficiency and risk
management as a priority
Some insurance firms are struggling to convince
shareholders that their balance sheets are sound
and that writing new business is not being done at
the expense of disciplined underwriting and pricing.
Insurers should:
• Raise the priority of balance-sheet & risk
management, and efficiency in operations, on the
corporate agenda at both the group/corporate and
divisional levels.
• Strengthen the functions that affect these priorities
(such as tax, finance and controls, actuarial, riskmanagement and compliance, IT and internal audit)
at both divisional and group level in order to exert
more influence over autonomous divisions.
• Build functional specialist teams in these areas at the
local, national and regional/global levels so they can
share leading practice.
• Consider a transformation programme for the finance
function, including management-information
solutions to improve the measurement and
management of capital allocation.
• Review the product base to understand its capital
efficiency.
3. Define the core business
BOMs have become more complex and opaque as
the boundaries between insurance companies,
intermediaries and distributors have become
increasingly blurred. Open architecture is also
forcing strategic decisions about whether
manufacturing and/or distribution is a core
capability. At the same time, insurers are facing
choices over the role of mature and emerging
markets in driving strategy. Without a clear
definition of core and non-core operations,
diversified insurance companies can become
unfocused. Insurers should:
• Define their core and non-core operations.27
• Simplify core operations and processes for scale and
efficiency (see Sub-section four). Seek functional
excellence in these areas.
• Offshore or outsource non-core back- and mid-officeprocesses. And/or create an affinity relationship for
front-end origination. (i.e. open architecture).
Practical steps towards a strategic approach
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The right combination Rethinking business operating models in insurance 17
4. Simplify and standardise processes
Insurance BOMs have become highly complex.
Many business units are accustomed to autonomy.
And product sets vary enormously, from complex life
products tailored to individual jurisdictions to
commoditised general insurance that can span the
globe. Attempts at reducing complexity have worked
to a degree. But as insurers have streamlined
processes or adopted new technologies, furthercomplexity has often arisen.
Divisions and functions seeking to differentiate
themselves on operational efficiency should look to
industrialise their operations. They should:
• Strengthen the group role in facilitating divisional
bargaining.
• Seek greater commonality in technology and
operational infrastructure, especially around support
and back-office functions. Working towards acommon language for IT and other processes
involving management information (MI) should be
an initial goal.
• Develop a common global footprint. This should be
geared for operational efficiency in mature markets
(where, our research suggests, most of insurers’
assets are still held), and for growth in emerging
markets.
• Tailor the footprint to reflect the company’s lines of
business or customer segments. For instance, non-life
personal lines is increasingly a commodity business
with similar features in most mature markets, implying
there is capacity to further develop common
processes.
• Adopt simplicity and standardisation wherever
possible throughout the value chain.
• Communicate internally, to promote internal
understanding of current business operating models
and to foster a common vision and rationale behind
proposed changes and the future model.
5. Scale up where appropriate
Insurers do not always maximise their potential
scale advantages – for the same reasons they have
not simplified their BOMs: Organisations led by
autonomous divisions have caused duplication and
inefficiency. They need to:
• Define what is globally scalable and what is not.
Local sales/distribution is often based on prevailingbroker/distribution networks and national
jurisdictions. While distribution may be diff icult to
globalise, a global/regional manufacturing (and
product development) capability may be created.
• Enable offshoring and set up centres of excellence
for selected functions. Give these functions an
opportunity to scale up on a regional or global
basis.28
• Seek scale opportunities in negotiating with volume
distributors. For instance, in sharing data acrossmarkets, disseminating best practices around claims
and other core processes, and creating regional
programmes around risk classes. Also, scarce technical
skills (for example, in investment, underwriting or
actuarial) can become trapped in one country when
they could be serving several.
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6. Allow functionally integrated, autonomous
operations where necessary
Operational efficiency is critical to gaining
competitive advantage in commoditised markets
where revenue growth remains difficult.
However, it is important that entrepreneurial units,
often carrying out a revenue-growth agenda, are
not crushed by a stifling business operating model
based solely on the mature-market ethos.
• Functions such as product development, underwriting
& claims, and sales & marketing will have to work
closely together to achieve specific customer and
product knowledge in unfamiliar territories.
Such territories may be emerging markets or business
units in mature markets seeking to sell innovative new
products. Reliance on regional or global scaled
operations may stifle such co-operation.
• However, opting out of balance-sheet and risk
management processes is not acceptable. Althoughoperational efficiency at the local level may be
compromised as entrepreneurial units rely on their
own infrastructure rather than shared services,
entrepreneurial units must be subject to standardised
functions relating to capital management and risk.
Dynamic economic capital modelling requires risks to
be measured on a like-for-like basis across the entire
business.
7. Communicate about the BOM to the external
world
Insurers are not banks. However, the financial crisis
has had a substantial impact on them, partly
because they failed to convince shareholders of
their financial viability. This was in part caused by a
lack of enterprise-wide transparency and suspicion
about insurers’ reporting and accounting
procedures. It was also caused by a failure tocommunicate adequately with the market.
Shareholders, insurance analysts and customers
are demanding greater transparency. Insurers
should:
• Revamp their financial and risk reporting to aid
transparency for all stakeholders. Be at the forefront
of compliance with globally trusted accounting and
risk measures, and with regulations and accounting
rules (such as IFRS, MCEV and Solvency II).
• Be in a position to explain their business goals andstrategy, and how the business model will achieve
those goals.
• Improve their investor relations, giving transparency
over capital requirements and new business growth,
attempting to foster a greater degree of trust.
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The right combination Rethinking business operating models in insurance 19
Conclusion
Shifts in the shareholder agenda, regulatory change and the recentfinancial crisis have highlighted organisational issues and constraintswith current business operating models.
At the same time, a number of financial issues (ranging from optimising tax domicileto risk governance and capital allocation) have become hot topics, affecting business
operating models. Finally, changes to the competitive landscape are forcing insurers to
redefine their markets, core competencies and their own relationship to the insurance
value chain. These factors are demanding insurers rethink the principles behind
business operating models.
Most insurers are responding by moving to scaled operations at the national and
regional level. It is now time for insurers to aspire to global integration. This calls for
a rebalancing of powers. Functional heads need more influence, especially over areas
concerning risk and balance sheet management, and centralised control is required to
drive co-operation and synergies between divisions (in charge of products, customer
segments and/or countries).
Yet driving towards greater centralisation and functional control must be tempered
with the need to give local autonomy, where justified by market requirements.
Insurance is in transition requiring flexibility in the globally scaled operating model.
This is particularly true in response to most global insurers’ expansion into emerging
markets. The mantra of “globalise and industrialise” must be refined.
It should only be followed on a selective and pragmatic basis. This does not mean
that initiatives to improve the business operating model should be piecemeal.
Work streams must be put in place that are aligned to the strategy, coherent with
the increase focused on balance sheet management and operational efficiency and
easily, persuasively communicated both internally and externally.
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1 Allan Afuah, Business Models, (University of Michigan,
Irwin, 2004).
2 Considerable variation in performance exists. For instance,
P&C providers have performed above trend for the sector.
3 Combined ratios among our sample of top global insurers
increased by two percentage points to 91.8 per cent in
2008. It is acknowledged that the combined ratio is not
entirely reflective of operational efficiency, taking into
account underwriting performance also. The loss ratio and
expense ratio for our sample of 24 insurers both increased
by 2.2 percentage points in 2008. However, over the
period 2005-2008, the combined ratio and loss ratio
dropped by 6.5 and 5.2 percentage points respectively
whereas the expense ratio remained flat.
4 This drop in share price was not restricted to the Deloitte
sample of 24 insurers. The Dow Jones STOXX 600 insurance
index dropped nearly 32 per cent over a similar time frame.
5 A recent study by Deloitte on European insurers’ EV
performance calculated an average fall in EV of 9 per cent
in FY08, with only a few notable exceptions showing an
increase. Deloitte LLP, Market Confused Embedded Value?
The Deloitte View on Year-End Value Results, (UK), 2009.
6 In our view, revenue growth may have been accepted byinvestors on the grounds that they could estimate EV
contribution to profit that new business could have
generated. With the realisation that profit could be
unreliable, as suspected for some time before the crisis, the
shift of focus was a way to analyse the insurance sector
more effectively.
7 Deloitte Research, The IFRS Journey in Insurance: a Look
Beyond the Accounting Changes, Deloitte LLP, 2008.
8 Total revenues include: premium income; reinsurance
income; investment and trading income.
9 From our sample of insurers, combined ratios dropped
6.5 percentage points between 2005 and 2008, indicating
slightly improved efficiency and the benefits of the
insurance cycle. However it is the belief of industry
commentators and senior insurance executives that there is
much scope for efficiency gains within insurance. In fact,
90 per cent of insurance analysts in our sample suggested
insurance was less efficient than other areas of financial
services.
10 In the United Kingdom, the Retail Distribution Review’s ban
on commissions in 2012 may result in fewer new business
sales in the UK life industry. IFAs may be less able to churn
portfolios to sell new products. However, on the upside,
less churn in back books increases persistency, resulting in
the value of back books improving and a lower
management burden. This primes the back book for
disposal to a consolidator. See: Deutsche Bank, UK Life
Assurers: Living in the Past, 28 July 2009.
11 Some global capital efficiency may also be achieved
through the use of an intragroup reinsurance vehicle.
Business operating models and capital structures should
be congruent.
12 According to JP Morgan, IAS 39 accounting changes could
have a profound effect on reported numbers, making
equities less attractive. See: JP Morgan, European
Insurance, Europe Equity Research, 8 July 2009.
13 The Economist Consensus forecasts: 2009, Deloitte Analysis.
14 OECD Composite Leading Indicators, 2009.
15 Use of this term is adapted from Allan Afuah, Business
Models, Allan Afuah, (University of Michigan, Irwin, 2004).
16 In the ‘adaptive’ insurance organisation, there are few
overarching goals for the organisation at Group/Corporate
level. Rather, the global business strategy is “pluralistic”,
comprising many objectives set at the local level.
17 Of a US (largely domestic) sample, 6.1 per cent were
country-led, 14.5 per cent were product-led, and 14.8 per
cent were customer-led. Among major global insurers we
would expect the country-led numbers to be significantly
higher. See: Deloitte DTT, New Global Operating Models in
a Shifting World, Insurance D-Brief, March 2009.
18 Many executives have been burnt by expensive integration
projects which have not worked out. However, integration
technology has dramatically improved in a very short time
making integration a more realistic prospect.
19 Insurers are behind the curve in using shared services.
Deloitte Research, Fifth Annual Survey: Offshoring in the
Financial Services Industry, 2008.
20 Specialist teams in the area should be represented at the
highest levels and be integral to BOM change initiatives.
21 Regulation in Europe is in principle fostering a region-wide
approach. Solvency II is an example of how supranational
regulation can facilitate the consolidation of balance-sheet-
related processes. However, the financial crisis has erected
some barriers to this approach. National governments have
been concerned to ensure that capital in each national
jurisdiction is adequate to underwrite risks within that
jurisdiction. This potentially restricts the flow of capital
from one part of the business to another, and makes the
case that not all processes – even within finance, actuarial
and risk functions – can be translated globally.
22 For more information on Deloitte’s perspective on
distribution see: Deloitte Research UK. Face to Face with the
Future: Sustainable solutions for the £66 billion distribution
change facing life and pensions providers, 2006.
23 Broking is attractive in today’s conditions as intermediating
is less capital-intensive than underwriting.
Notes
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Deloitte LLP is the United Kingdom member firm of DTT.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the
principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice
before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers
on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or
liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
© 2009 Deloitte LLP. All rights reserved.
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Key contacts
Andrew Power
Insurance Strategy Partner
+44 (0)20 7303 0194
Mark FitzPatrick
Insurance Leader, UK
+44 (0)20 7303 5167
Joe Guastella
Global Insurance Leader
+1 212-618-4287
Russell Collins
Financial Services Leader, EMEA
+44 (0)20 7303 2929
Research contacts
Chris Gentle
Head of Deloitte Research UK
+44 (0)20 7303 0201
Seb Cohen
Deloitte Research, UK (report author)
+44 (0)20 7303 2478
Contacts