managing growth in stringent regulatory environment_solvency ii and what it means for eu insurers
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MANAGING GROWTH IN A STRINGENT REGULATORY ENVIRONMENT:SOLVENCY II AND WHAT IT MEANS FOR EU INSURERS
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Two thresholds:
– Solvency Capital Requirement (SCR)
– Minimum Capital Requirement (MCR)
SCR is calculated using either a standard formula or, with regulatory approval, an Internal Model
MCR is calculated as a linear function of specified variables: cannot fall below 25 percent, or exceed 45 percent of an insurer's SCR
Harmonized standards for the valuation of assets and liabilities
Effective Risk Management System
Own Risk and Solvency Assessment (ORSA)
Supervisory Review and Intervention
Insurers are required to publish details of the risks, capital adequacy and risk management practices
Transparency and open information regarding capital requirements and risk exposures are intended to assist market forces in imposing greater discipline in the industry
Solvency II was implemented on 1st January 2016 The regulation is divided into 3 areas also called pillars
Following are key changes compared to the previous standard i.e. Solvency I
Pillar 1 – Financial Requirements
Pillar 2 – Governance and Supervision
Pillar 3 – Reporting and Disclosure
Establish functions, or specific areas of responsibility and expertise, to deal with risk management, risk modelling
(for internal model users), compliance, internal audit and actuarial issues
Supervisory Review Process (SRP) - Better
and earlier identification of insurers, which might
be heading for difficulties
Own Risk and Solvency Assessment (ORSA) -
Likely future developments to be
considered
Introduction of economic risk-based
solvency requirements
Capital requirements need to be maintained
over and above the technical provisions
Source: Lloyd’s
Source: European Commission
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Asset Management
Usage of analytics Reduction in asset liability duration mismatch Stronger collaboration with other
departments
Product Development
Risk appropriate pricing Product profitability analysis Usage of analytics
Sales and Distribution
Stronger underwriting principles Usage of analytics Stronger collaboration with other
departments
IT and Operations
Stronger collaboration with other departments
Streamlining of IT and operational systems Investments in new tools and technologies
The directive has impacted the entire insurance value chain in the EU and primarily risk management function
Impact of Solvency II is varied across functions
0% 25% 50% 75% 100%
Product Development
Asset Management
Sales and Distribution
IT
Finance
Risk Management
Actuarial
Impact of Solvency II
Very High Impact High Impact Medium ImpactLow Impact Very Low Impact
Source: Based on interviews with 23 senior executives from leading European insurers
Insurers are leveraging insights from analytics in response to Solvency II
Top three focus areas of insurers for below functions
Sup
po
rt F
unct
ions
Co
re F
unct
ions
Source: Based on interviews with 23 senior executives from leading European insurers
Read the full report to know more about the Solvency II’s impact and resultant insurers’ response
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Cutting down risks (underwriting and market related) may yield higher shareholder returns in case of P&C business but could pare share price gains in case of life and health insurance*
In the case of life and health insurance, companies need to maintain optimal level of risks i.e. neither high nor low, to outperform peers*
– Deciding on the optimal level of insurance and market risks in the case of life insurance business can be tricky
– Drafting growth strategies according to the market attractiveness and intensity of competition in a particular geography where the insurer operates can help optimize risks
– Companies should also consider their own capabilities while chalking out their growth strategies
Insurers should manage risks prudently to ensure sustainable growth
Different risk management requirements are needed for property and casualty and life & health businesses to garner higher shareholder value
Following three approaches can help companies achieve the objective of managing risks prudently
*WNS DecisionPoint™ Study
Carefully manage all risks with robust risk assessment frameworks to make suitable adjustments
Handle risks optimally to achieve higher returns with minimum capital requirements
Optimize operations and leverage digital technologies to reduce costs and offset potential losses from various risks
Read the full report to know more about the study
Read the full report to know more about the recommendations to manage risks prudently
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Risk culture of the insurers need to be transformed
Risk Management Maturity Framework
Non-existent
Insurer has not recognized the need for risk management function
Risks are not directly identified, managed and monitored
Risk management processes have not been developed
Reliance on individual efforts to identify, manage and monitor risks
Risk management processes have been implemented, but they are not consistent and effective
Certain risks are defined and managed in silos
Risk management is in place, and is designed and operated in a timely and consistent manner
Actions are taken to address high priority risks
Advanced risk management capabilities, strong collaboration and coordination across business units
Processes are actively utilized
Leading-edge risk management capabilities are present
Risk management is embedded in strategic capital allocation decisions
Ad hoc Initial Repeatable Managed Leadership
Source: WNS DecisionPoint™ Interview
Risk management now plays a pivotal role in board meetings and strategic decisions
Successful insurance organizations distinguish themselves from competition by attaining highest risk management maturity i.e. leadership stage
Managing risks prudently will require business transformation including a robust change management program with strong leadership commitment
Companies need to infuse analytics within decision making processes to manage and monitor risk, and assess capital requirements
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