2012 05 03 kpmg insurance finance transformation the business case for change accessible
TRANSCRIPT
FINANCIAL SERVICES
Insurance Finance
Transformation: The business
case for change March 2012
www.kpmg.co.uk/insurance financetransformation
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
CoNTENTS
INTRoDuCTIoN & ExECuTIvE S uMMARy 1
BACkGRouND 1870 to 2002 “How did we get in this mess?” 3
THE D RIvERS F oR C HANGE 2002 to 2012 “Why is finance suddenly so important?” 5
ISSuES “What are the problems we have to solve?” 7
SySTEMS AN D D ATA 8
PEoPLE 11
REPoRTING PRoCESS 13
CoNCLuSIoN The business case “Why should we make this investment?” 15
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
Introduction & Executive summary
PAuL BISHoP
Lead Partner for Insurance Finance Transformation
30 Percent
the potential to reduce
Finance operational
costs by up to 30 Percent
Over the last five years, the Finance functions of almost every major UK life insurance company have been going through significant change with a level of investment never seen before. The current phase is dominated by Solvency II which has crystallised a number of long standing issues and challenges in these finance functions. These can no longer be ignored as regulators, markets, rating agencies and other key stakeholders increase the pressure for faster, more reliable and a significantly greater volume of financial information than ever before. At the same time there is the constant pressure on CFOs to reduce operational costs and investment budgets have been scarce for support functions.
For decades, life insurers have underinvested in Finance and have ‘coped’ with a steady increase in internal and external reporting, and with new products and new structures, all with short term solutions. Most have now reached the stage where incremental change will not work and the fundamental underlying issues around data, systems, models, processes and people have to be addressed.
CFOs and finance leadership are generally well aware of this. They know only too well, that the legacy finance systems for insurers are horrendously complicated, slow and high risk to change. These systems typically consist of multiple platforms, a range of inconsistent data sources, link into complex valuation calculation engines and are surrounded by an intricate web of spreadsheets. The inefficiency and inflexibility from this systems architecture and related processes are further compounded by organisational issues, where silo behaviours and lack of communication result in a high level of dependency on key individuals and breakdowns in communication. All this has to change.
However, the business case for this change has always been difficult. The challenges to Finance have built slowly over time, and superficially they have been met – Financial Statements and Regulatory Returns have been produced on time with clean Audit reports, Boards and Management have reviewed and discussed monthly and quarterly packs. There are operational cost benefits from change, but it is often hard to justify the investment in these terms alone. On the other hand, it is difficult to be direct with a Board where the real issue is the fragility of some of the key numbers and the focus is sustainable speed and quality of reporting. Solvency II has helped by providing a regulatory mandate to address many of the underlying issues, and many life insurers have used this as an opportunity to improve models and systems in particular, but there is still a lot to be done.
1 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
…spending substantial sums of money to address these risks when they crystallise, but this is arguably too little too late
In our experience, critical to an effective Business case is a full analysis of the risks inherent in current systems and processes and in particular the risks and costs inherent to not changing them. Boards and senior management are generally protected from the ‘warts and all’ view of Finance and need to be shown the risks they are running – which are generally consistent across the industry.
In most cases, there is a compelling Business case, however the key is ensuring the Executive Board are clear on the impact of not making the right investment from a commercial and operational view.
From our experience with a number of clients we know there are some clear financial benefits, with the potential to reduce Finance operational costs by up to 30% and to reduce significantly, capital reserves, through reduced operational risk. But arguably the biggest benefit is mitigating the risk associated with poor financial information both internally and externally. Companies typically end up spending substantial sums of money to address these risks when they crystallise but this is arguably too little too late as the damage is already done.
This article explores the issues raised, and concludes with our view as to how to frame the case for change. We will be producing a series of best practice papers, which focus in more detail on some of the more challenging areas and emerging solutions.
I hope you find this article both interesting and relevant.
Figure 1: Summary of issues and risks in insurance finance functions
Issues Risks Benefits of change
te
ms
Data
• Most life insurers have significant issues managing/ controlling data, especially policy data from legacy systems
• Regulators (Solvency II) require traceability and transparency from reports to underlying data
• Markets/Boards require drill down to support detailed analytics to tight timetables with a high degree of accuracy/reliability
• Inefficient/slow data processing, increasing costs and delaying reporting and increasing risks of error
• Regulatory censure for non-compliance
• Operational efficiency – estimated value of 20-30% savings in finance
• Capital & Cash – 50% of explicit & implied reserves, 10% of
ta &
Sys
• Many life insurers have multiple models, never designed • Prudential capital operational risk capital
to support current reporting requirements in terms of: required to reflect
Da
Model architecture
– speed of reporting risk of errors
• Reduced cost of future – detailed outputs
– transparency and controls over inputs and processing
• Inability to provide robust explanations leads to loss of
change – 25% of overall finance change budget
Surrounding technology • Large number of End user computing (EUCs)
internal and external credibility
• Improved speed and
People
• Silo mentality particularly between accountants and actuaries with a lack of accountability/ understanding of overall results
• Inflexible systems unable to respond to change
quality of reporting – value 5% of market capitalisation
• Key man dependencies • Business decisions
Reporting • Close process driven by system constraints/
based on late, poor quality, inadequate financial information
• Improved business decision support – value
speed organisational design is slow and liable to error determined by business
Source: KPMG LLP (UK) 2012
The business case for change 2© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
BACkGRouND: 1870 to 2002 “How did we get in this mess?”
…external reporting requirements for the
life insurance industry did not change
significantly for over
Most people do not realise that external reporting requirements for the life insurance industry did not change significantly for over 100 years. Between 1870 and the early 1990s, the Financial Statements of a UK life insurer were very limited, reported relatively late, and did not provide any of the following:
• Any useful profit and loss information, instead providing a life fund statement of accrual adjusted cash flows and a transfer to profit and loss
• Any quantification of long term policyholder liabilities, instead including the amount of the life fund
• Any significant disclosures – a typical set of financial statements was around 10 pages
Figure 2: Extract from 1870 Life Insurance Companies Act and Hambro Life Assurance plc 1981 Annual Accounts
Set out below are the Revenue accounts formats from the 1870 Life Insurance Companies Act and Hambro Life’s 1981 Financial Statements. As you can see after 110 years later not much has changed. Hambro Life was a FTSE 100 company at that time, and its Financial Statements were only 11 pages long – the Financial Statements of a typical FTSE 100 life insurer today would be 180 pages and counting.
Revenue schedule as set out by Life Assurance Companies Act 1870
Source: Life Assurane Companies Act 1870
Hambro Life Assurance Company Annual Accounts 1981
Source: Companies House archives
Source: KPMG LLP (UK) 2012
3 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
…it is only really with the financial crisis of 2001/2002 and the capital exposures it identified, …that the position really changed
There were regulatory reports, such as the DT1 returns, which provided more information, including details of liabilities, but disclosure was very limited and the deadline was six months. Limited companies were essentially valued on dividend flows. There was a significant reliance on the Appointed Actuary to manage capital, which for most major companies was not seen as an issue as there were significant surpluses and in any case with profit benefits in particular were regarded as highly flexible. Strategically and operationally, Life companies were very focused on sales, and most management reporting was around sales volumes and related activity and expenses.
In late 1994, Modified Statutory was introduced into Life insurance financial reporting. Embedded value reporting had already been introduced by the banks in the 1980s, and now found its way into Life Company reporting during the ‘90s. This increased the detail required for statutory reporting, but did not really fundamentally change things.
It was only really in the new millennium with the financial crisis of 2001/2002 and the capital exposures it identified, the Equitable case and its impact on managing with profits, the introduction of IFRS and the codification of embedded value into EEV that the position really changed, both internally and externally.
The business case for change 4 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
THE DRIvERS FoR CHANGE: 2002 to 2012 “Why is finance suddenly so important?”
All the factors raised in the previous section resulted in a period of intense change from 2002 to the current day and this level of change looks set to continue for the foreseeable future. These changes have been driven by a number of factors, namely:
• Regulation. European Embedded Value and major changes to solvency requirements in the UK are already in place. The next phase which includes
Market Consistent Embedded Value and Solvency II is due for implementation and IFRS Phase II is not too far away.
• Business needs. Insurance markets have become increasingly open and price competitive during this period and at the same time many insurers have had their capital eroded by increased solvency requirements, adverse investment markets and in
some cases, poor business decisions. With capital scarce and profitability under pressure, management and Boards need more relevant, regular and timely financial information, around actual and planned product and channel profitability and capital requirements.
• The market place. External stakeholders, principally analysts and rating agencies, are also looking
Figure 3: Summary of some of the key Solvency II requirements
Solvency II requirements Issues
• Detail in key areas that is robust enough to bear • Previously unused to such scrutiny, numbers regulatory scrutiny, possibly external audit have generally contained significant estimates
Disclosures • Detailed analysis of assets and liabilities, and related and approximations Pillar 3 capital requirements, plus profit and loss attribution
• The data in the Quantitative Reporting Template (QRTs) • Insurers finance systems are complex, require must be “complete, accurate and appropriate” and a number of reconciliation and controls and do not
Data there must be complete traceability from the QRTs back to the underlying data
easily support traceability of data
• Increased requirements for granularity of data
• Demanding requirements as regards documentation • Limited documentation exists and requires remediation of models, processes, policies and systems • Amending and documenting old systems will be
Documentation expensive and has limited value going forward
• Quantative Reporting Templates (QRTs) will be required • Currently FSA Returns are required within three within six weeks months, and more complex ICA calculations within
six months Timetable
• Producing and validating figures for submission to regulators in shortened timescales is a very real challenge
Source: KPMG LLP (UK) 2012
5 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
…many insurers have had their capital eroded by increased solvency requirements, adverse investment markets and in some cases poor business decisions
Management and Boards need more relevant, regular and timely financial information, around actual and planned product and channel profitability and capital requirements
for more robust, more detailed and more consistent information about the performance of insurers. The market has clearly penalised the life sector in particular for its perceived lack of transparency. The increased focus also reflects the change of ownership in the industry and in capital structures, with significantly greater use of debt and other non-equity capital, the effective demise of mutuals and the decreasing prominence of 90:10 funds. Moreover, analysts are not just concerned about actual results, they also want reliable forecasts and plans.
• value. There is also increasing pressure on finance to add value, both in terms of meeting needs, but also in terms of efficiency. Many insurers have underinvested in finance systems, processes and people,
and have dealt with recent change by adapting and extending historic capability. This has led to a labour intensive process and a high cost base for finance which will need to be addressed. Cost reduction is at the forefront for many CEOs.
Specifically in terms of Solvency II requirements, there is little or no flexibility in a number of key areas which present particular difficulties to life insurers, as summarised in Figure 3.
Further information on Solvency II requirements can be found on our KPMG website1, including a recent article on Solvency Optimisation in the Business2 which talks about insurance management historically being focused on value protection and reducing losses and not forward looking and value creating.
It discusses how companies need to optimise business performance to ensure they remain competitive in the post- Solvency II world.
The Solvency II requirements mean that the cost of minimal compliance is high – amending and documenting old systems is expensive – and the incremental cost of strategic solutions that much less. So, for many CFOs, Solvency II represents a once in a lifetime opportunity to address the fundamental issues – a view KPMG share – which partly explains the current level of major change programmes.
1 www.kpmg.co.uk/solvencyii
2 Extract from: ‘Evolving Insurance Regulation: Time to get ahead’, KPMG International, February 2012
The business case for change 6 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
ISSuES: “What ar e the problems we have to solve?”
Financial reporting has long been the poor relative in the life industry
So from a Financial Reporting and Management perspective, the life insurance industry was stable for over 100 years, and then 10 years ago started a process of change that continues to accelerate. This was always going to present challenges, but there are other factors which make it worse. Finance and particularly Financial reporting has long been the poor relative in the life industry. It has always taken second place to sales
and customer service, to the extent that in many companies major changes around products, corporate and fund structures and acquisition integration have been initiated with only limited consideration of Finance, and this has contributed to the complexity of underlying systems and models. More subtly, Finance has been dominated until very recently by the Actuarial profession, who tend to be more comfortable with estimates and less focused on detailed reporting disciplines and controls, than accountants. This has left Finance facing a greater scale of change than was or is generally understood by management and the Board, and less able to deal with that change. Key to any Business case is making this clear.
So what are the issues that require investment? The next section highlights the common issues under three headings Systems and data, People and Reporting processes.
Finance faces a greater scale of change than was or is generally understood by management and the Board
7 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
SySTEMS AND DATA
At a high level, every life company has the same data flow from underlying records through to reports. In Figure 4 we show the typical data flows within an insurance company.
Figure 4: Typical data flows in an insurance company
Published Prices
unit Pricing
Financial Statements, FSAand other internal/external
General Ledger
Returns reporting
valuation System
Investment Accounting -other Sub Systems Policy Administration
Third parties e.g. Customers, Suppliers, Investments, Staff, Banks etc.
Source: KPMG LLP (UK) 2012
Multiple systems on different platforms built at different times and potentially from different companies acquired over time, need to interface to produce the valuation calculations and financial reports. There are typically a number of issues with the core systems which are summarised in Figure 5.
Multiple systems on different platforms built at different times and potentially from different companies acquired over time
The business case for change 8© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
SySTEMS AND DATA Continued...
Figure 5: Summary of key issues with insurers’ systems architecture
Systems Issues Impact
Provide: • Multiple policy systems (usually a result of multiple • As policy data forms core for
Policy Admin
systems
• Premiums, claims & commission due & received/ paid to accounting systems
• Policy data for calculation of liabilities, Embedded values & Capital
acquisitions of old books) typically built pre-2000 reflecting requirements of that time
• Old systems, poorly documented and very difficult to change
• Often do not have policy level accounting data & limited claims data for calculations as functionality never fully developed
• Requires complex & time consuming manual reconciliation
• Lacks flexibility and drill down capability to support changes in reporting, limited granularity
•
•
revenue account, liabilities, EV and capital requirements calculations the issues result in high processing costs, reconciliation and development time across multiple systems
Errors and inconsistent actuarial data, resulting in reporting delays and inefficiencies requiring extensive valuation and remediation
Changes to systems slow, costly • Produces actuarial and accounting data on inconsistent and high risk to reporting
basis. Actuarial data often has serious data quality issues
Provide: • Multiple models on different platforms, built over time • Subject to error and re-work,
• Calculation of policyholders’ liabilities
by Actuaries to support specific products, or blocks of products, are not flexible to support current reporting requirements
•
resulting in reporting delays
Outputs require significant expert validation and review
valuation • Poorly documented, lack flexibility and transparency • Inconsistent with accounting models • Built to support small number of runs and are inefficient records i.e. product hierarchy, which
with long run times, require extensive manual intervention makes analysis and control of and subject to failure and re-work results overall difficult
• Not well controlled internally • Changes difficult and risky to implement
Provide: Investment accounting • Extensive EUCs required to support
other systems
Investment Accounting
General ledgers
• Investment income and gains
• Expenses
• Accounting records and transactions
• Do not fully support sub-fund product and asset matching requirements
General ledgers
• Multiple ledgers common following acquisition, using interfaces to consolidate
• Ledgers and consolidation systems generally struggle to support multiple reporting bases – all major life companies
•
reporting, impairing transparency and increasing risk of errors
Potential for errors, requires reconciliation and manual calculations for different bases, time spent manually reconciling between bases
report on at least three bases and enhanced analytics
Source: KPMG LLP (UK) 2012
9 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
Each incremental change… has been covered by complex, ingenious – even brilliant- short term solutions, layered on top of the underlying systems…
Almost without exception, the response to these issues until recently has been tactical – end user computing (“EUCs”), primarily spreadsheets. This is true at every level, be it data validation and manipulation to build model point files, collating and analysing model outputs, providing analysis or reconciliations that the ledgers cannot support or delivering multi-GAAP reporting and enhanced analytics. Each incremental change in internal or external reporting, new acquisition or restructuring has been covered by complex, ingenious – even brilliant – short term solutions, layered on top of the underlying systems, and on top of earlier EUCs. The problem today is that whilst each EUC no doubt made sense as a quick, cheap response to an immediate need, overall they have led to a systems architecture that makes no sense at all – it is incredibly complex, almost impossible to understand, extremely difficult to control or change and yet again poorly documented.
The overall impact is very limited analysis capability for internal business decision support and external explanation of results and high risk of errors in reporting, and distrust from the markets and from Regulators and ratings agencies. This in turn leads to poor decisions, greater scrutiny, reduced share price, increase in capital requirements, all leading to increases in costs and impacting profit. A suitable solution needs to be found.
The business case for change 10 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
PEoPLE
Finance leadership has lacked the vision, the skills and often the inclination to drive change
Developing, operating and managing all the data, systems and processes are people. The issue in life insurance finance is very simple – the bulk of those currently in a position to provide leadership developed their core skills prior to 2001, in a period when Actuaries were seen
as a breed apart, there was limited interaction between them, accountants and other professionals, and limited demands as to the speed, quantity and quality of reporting.
Figure 6: Summary of some of the key people issues
Issues Impact
• Accountants not • Finance responsible involved in calculation for reporting but unable of liabilities to explain technical
Roles and functions
• Actuaries operate unchallenged
issues or results, liabilities and movements
• Lack of finance • Limited review &
leadership challenge control Actuarial
• Little discipline around • Reporting inefficiencies Finance
Control disciplines
process reporting deadlines
• Materiality differences between accountants and actuaries.
•
•
Open to risk of errors
Reviews performed at different levels of materiality
Annual Accounts
Actuarial Reports models
• Analysis of surplus control judgmental & Recons performed at high level
Limited challenge &
analysis
as receivers of • Actuaries developing
systems separately, outside of normal IT development and
• Inconsistent model development, unsupported framework, leading to processing
opaque results Multiple iterations and runs to
produce results
Systems run disciplines
• Predominance of
and review inefficiencies – reporting delays
tactical solutions • Excessive reliance created by Finance on individuals to run
processes, review & validate
Source: KPMG LLP (UK) 2012
11 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
Complexity of systems, the proliferation of EUCs, the extent of data and modelling issues all led to excessive reliance on individuals with expert knowledge
In Figure 6 we highlight some of the challenges that have created structural and skills issues in the current environment, where there is strong demand for quality analysis of results, and for efficient, integrated processes and systems which require financial and other professionals to work closely together.
Conversely, the systems issues outlined in Figure 6 contributed to a further people issue – key man dependency. The complexity of systems, the proliferation of EUCs, the extent of data and modelling issues all led to excessive reliance on individuals with expert knowledge to run processes and to review and validate results.
And all this is self-reinforcing. Finance leadership has lacked the vision, the skills and often the inclination to drive change – which is challenging and uncomfortable, and is likely to undermine their authority which is often based on their unique expertise in dealing with today’s problems.
The business case for change 12 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
REPoRTING PRoCESS
Finance will have to produce a fully reconciled balance sheet including all liabilities by the end of week three
Solvency II will require Life companies to deliver the quarterly Quantative Reporting Template (QRT) within six weeks to the Regulators. In order to do this, Finance will have to produce a fully reconciled balance sheet including all liabilities by the end of week three, to allow sufficient time to calculate required capital, profit
and loss attribution and to complete review and sign-off procedures in the following three weeks.
In Figure 7 we set out our view on what the expected close process will be under Solvency II, benchmarked against a typical close today.
Figure 7: Illustration of a future state quarterly quality close process under Solvency II over current close timetable
ES
oLR
CE
GD
EL
Current process timeline Restatement adjustments (e.g. UK GAAP To IFRS)
Asset Data
Policy Data
Recs & Adjs to correct data
Agree Non -Recurring Expense provisions
Expense Data
Further acceleration of ledger close components
GN
vI
ER
SE
RLAI
RA
uC
TA
Demographic & Expense Assumptions
Economic assumptions & ESG’s generated
Model Point Files created
Manual Reserves calculated
Adjs Significant acceleration of modelling
Model runs (all bases) and analysis of change
Analysis of movement/ surplus
Quicker and higher quality analysis
Current process timeline
Current process – ‘Analysis change, RCM’ in Wk 8
Pre Wk 1-2 Wk 3 -4 Wk 5 -6 Wk 7-8 Wk 9-10 Wk 11 -12 Wk 12+
TR
I – Q
y I
CN
EvL
oS
Stress tests
Capital calculations
Quarterly QRT
Additional modelling and reporting
SIS
yLA
NN
& A
oIT
AG
ER
GG
A
BU IFRS Result to Group
BU EEV Result to Group
Press release
Current process timeline
Current process ‘Board Approval & Results announcement’
Source: KPMG LLP (UK) 2012
13 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
…CFOs are asking how will they reduce the process from twelve to six weeks and still be confident … disclosing externally
The question CFOs are asking is how will they reduce the process from twelve to six weeks and still be confident with what they will be disclosing externally.
So what are the issues behind the current timetable? We believe these can be summarised as shown in Figure 8.
As we can see the reporting process issues are closely interrelated to the technology and people issues.
Figure 8: Summary of reporting process issues and their impact
Reporting process issues Impact
• Poor processing controls result in errors being detected late in the process
• Multiple reporting bases supported by different teams and different systems and models
• System constraints on analysis of surplus make it estimate based and highly judgmental
• Re-work delays and disrupts the reporting process
• Excessive time spent reconciling results on different bases, duplication of effort
Reconciliation -& Re work • Length of run times are uncertain and can lead to
major delays
• It takes 2-3 weeks to generate inputs to models due to manual intervention required
• Heavily reliant on EUCs which are inflexible and require manual intervention
• Inefficient manual processes which requires extensive review and correction
• New reporting requirements result in additional layers Data and model point creation
of EUCs, increasing complexity and processing speeds
• Number of models developed long time ago, when calculations were deterministic and liabilities only calculated twice a year
• All calculations are based on same underlying data and core cashflows – however can be different models for different reporting bases
• Can be different models for different products
• Model structures not built to run on fast reporting timescales
Model • Multiple models result in multiple inputs, competition
processing for run space and problems with reconciliation and
times analysis
• Multiple models inefficient and difficult to control and change
Source: KPMG LLP (UK)2012
The business case for change 14© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
CoNCLuSIoN: The business case “Why should we make this investment?”
there is a compelling business
caseM
ajor Finance change programmes
involve significant costs, but there are substantial benefits for most life insurers. Regulatory compliance is a given, and we would expect any business case to reflect the incremental cost of improvements over and above any regulatory minimum. We would expect to see the following items, highlighted in Figure 9, in the business case.
We have put some indicative values on the benefits based on our experience with a number of clients. Clearly these values are all dependent on each individual company’s circumstances and the level of investment made. Nonetheless, in general we believe there is a compelling business case to be made. There are some clear financial benefits, such as reducing operational costs and capital, through reduced operational risk –
Figure 9: Summary of benefits of change
Issues Investment and benefits value
• Cost of Finance has generally increased recently with high project spend and some level of external support to business as usual in the lead up to Solvency II
• Most life companies, however spend a significant proportion of their people costs in Finance on low value processing, which can be significantly more efficient with the introduction of the appropriate technology
• Looking forwards, KPMG believe that there are significant opportunities for cost reduction in key processing areas such as;
– Policy accounting
– Data extraction and management
– Model development and processing
Estimated at 20% to 30% of the
operational cost of Finance Efficiency
• Most Life companies hold significant reserves for the risk of accounting and actuarial misstatements, either explicitly or implicitly through the use of product assumptions. They will also hold Capital for Operational Risk, which will again be increased if there are reporting issues
• Enhanced controls and improved quality of reporting will result in a release of reserves and a reduced capital requirement
Estimated 50% of explicit or implicit
Capital reserves & 10% & Cash of Op Risk Capital
• Financial Reporting will continue to change to meet • A more robust and flexible IT and Estimated value Reduced cost internal and external requirements – IFRS is the obvious modelling platform, supported by 25% of annual
of future example, but will only be a part of developments over reduced key man dependencies will Finance change change the next 10 years. For many Life companies, changing reduce the costs and increase the budget
Finance is very hard and very expensive at present speed of change
Improved • In practice we have found over the last three years that this • Enhanced controls, transparency and Estimated speed & is the key driver of Finance change, and is a major benefit quality of analysis will reduce the risk of value up to
quality of but one most life companies only consider fully when the error and improve the quality of external 5% of Market reporting risks of errors and misunderstanding actually crystallise presentation of results capitalisation
• Poor quality, late management information with limited • Faster, more reliable management information, supporting business decisions on best uses of capital will improve return on investment as well as reducing overall capital costs i.e. allocating available capital more efficiently less reliance on more expensive external debt
Benefit to be Improved drill down capability can result in inefficient decision determined by business making. More time spent by Finance on reconciling the business
decision and re-working than value-added analysis of results/ support metrics and trends
Source: KPMG LLP (UK)2012
15 The business case for change © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
Key to the business case approval will be ensuring the Board are clear on the impact of not making the right investment from a commercial and operational perspective
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
many Life insurance companies have substantial reserves set aside for potential errors – but arguably the biggest benefit is mitigating the risk associated with poor financial information both internally and externally. Companies typically end up spending substantial sums of money to address these risks when they crystallise but this is arguably too little too late as the damage is already done.
Taken together the issues we have highlighted in this article, represent a significant barrier to change that cannot be dealt with incrementally through tactical measures. It requires an integrated solution that will bring finance up to the standards required by Solvency II and increasingly expected by external markets and Boards.
Key to the business case approval will be ensuring the Board are clear on the impact of not making the right investment from a commercial and operational perspective.
In our next article we will be looking at some of the underlying solutions to these issues and their benefits based on our experience of best practice working with some of the UK leading life companies.
For further information on KPMG’s Insurance Finance transformation position, please visit our dedicated website3. Should you have any questions relating to the issues raised in this article or, questions relating to your firm’s finance transformation business case, please feel free to speak to your usual KPMG contact or one of our subject matter experts listed.
3www.kpmg.co.uk/insurancefinancetransformation
The business case for change 16
FINANCIAL SERVICES
InsuranceFinance
Transformation:The business
case for changeMarch 2012
www.kpmg.co.uk/insurancefinancetransformation
Contact us
Paul Bishop Insurance Finance Transformation Leader T: +44 (0) 780 261 4970 E: [email protected]
Martina Neary Finance Transformation T: +44 (0) 779 744 7092 E: [email protected]
Brid Meaney Finance Transformation T: +44 (0) 782 795 4938 E: [email protected]
Richard Care Modelling T: +44 (0) 777 059 8349 E: [email protected]
Daniel Clark External Reporting T: +44 (0) 781 111 1962 E: [email protected]
Andrew Lyon People and Change T: +44 (0) 787 675 6332 E: [email protected]
Gavin Lubbe Systems T: +44 (0) 781 730 6775 E: [email protected]
Phil Brooke Financial Services Sourcing T: +44 (0) 759 556 5121 E: [email protected]
Louise Portelli Programme T: +44 (0) 759 556 5121 E: [email protected]
www.kpmg.co.uk/insurancefinancetransformation
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© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
RR Donnelley l RRD-263427 l March 2012 l