contents€¦ · europe and at worst a double dip recession . this means that both life and...

Contents

Out with the old, in with the new . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

New Year’s resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Chief executive officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Crisis readiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

regulatory Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Finance and risk executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Getting to Grips with the numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Managing risk and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Business Planning and steering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Chief operating officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Cost Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Digitalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

A happy and prosperous New Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Copyright © 2011 oliver Wyman ii

out With the olD, in With the neW

As we come to the end of what has been a turbulent year across the global financial services

industry and beyond, and with little evidence of a return to a more stable environment,

senior executives across the insurance industry are considering what their priorities should

be over the next year .

over the last few months, oliver Wyman has conducted numerous discussions with

leading senior executives across europe . in this short report we have categorised the

key issues and priorities that were raised in these discussions into themes and collated

them to produce a series of ‘Word Clouds’ providing a visual representation of what

the top priorities are for Chief executives, Finance and risk executives, and Chief

operating officers across the european insurance landscape . the size of each word in

the exhibits that follow is proportional to the number of times this was brought up in our

recent discussions .

While this is not the output of a statistical survey, nor a detailed research report, we hope

that it gives readers some food for thought as they themselves start thinking about their

resolutions for 2012 and beyond .

Copyright © 2011 oliver Wyman 1

NEW YEAR’S RESOLUTIONS

CHIEF EXECUTIVE OFFICERS

Given CEOs’ responsibility for oversight across the whole business, the breadth of issues

raised is not surprising. Cost management and challenges in attracting and retaining

talent were mentioned by many. However four terms were brought up most consistently,

and it is these which we have focused on. Two issues, crisis readiness and regulatory

change are seen as short term issues, while the remaining two, growth challenges and

business model threats, were seen as medium term issues.

CRISIS READINESS

With the Eurozone crisis still looming large there has been a lot of focus on companies’

investment portfolios and trying to manage down exposures to peripheral European

sovereign debt as well as other securities and assets that might be a�ected by a deepening

of the crisis. However CEOs are now turning their attention to the operational implications

of their crisis response, and the strategic implications for those insurers fortunate enough

to be net beneficiaries of the crisis.

Operationally CEOs are concerned that the right organisation and processes to deal with

sudden market disruptions are not in place. We have been working with clients to develop

an operational crisis response programme which includes:

Copyright © 2011 Oliver Wyman 2

• Developing a good understanding of what metrics and indicators they should be

monitoring and what their exposures are

• identifying the likely direct impact of a crisis (e .g . falling asset values, loss of liquidity

in key markets) as well as the indirect impacts (e .g . failure of suppliers, distributors

or counterparties)

• Developing a response plan including an escalating sequence of actions to be taken

when particular trigger levels are breached as well as a market communication plan

• Avoiding inertia within the decision making team (i .e . decisions are made at the right

level without unnecessary escalation, even for tough or unpopular decisions) .

Broader strategic questions are also being considered . Companies that are heavily

exposed and / or weakly capitalised are taking a hard look at their portfolio, focusing

management and Board attention on the marketability of non-core businesses and likely

sales price in the event of (or before) being required to raise capital . Conversely, strongly

capitalised companies are considering what strategic opportunities this could create

(whether through acquisition or other means) in order to position themselves to capture

these when the time is right .

reGulAtorY ChAnGe

Although a number of issues fall within the umbrella of regulatory change, many of these

are market-specific . unsurprisingly, however, the one which looms most prominently and

most consistently for our european clients is solvency 2 . the implementation deadline for

solvency 2 is fast approaching, and many of our clients are already starting to anticipate

the new framework in their actions today . We believe that understanding the strategic

implications of the new regulations should be a short-term priority for all insurance Ceos .

in particular, we see three areas of focus:

• What are the implications of solvency 2 for product strategy? some products will

become more onerous to write including annuities and guaranteed business on the life

side, and catastrophe risks and long-tailed liabilities in non-life . others, for example

unit-linked products will become less onerous . similarly, some players will be relatively

advantaged at writing particular risks due to diversification benefits whereas others

will need to consider changes to product design, hedging strategies or product exits .

Given the lead times associated with such decisions, it makes no sense to run the 2012

strategy process on a solvency 1 basis

• We are now starting to get a clearer picture of which institutions will emerge from

solvency 2 better capitalised, and which will struggle . We expect to see a wave of solvency 2-driven M&A activity as poorly capitalised insurers are taken over . Just

as importantly, there will be significant restructuring – for example, we may see

insurers looking to dispose of capital-intensive us business lines, back-book carve-outs

where these are no longer needed to finance new business, or restructuring of the legal


entities within a group, and potentially separating out service companies from core

insurance entities . in all these cases, those players who anticipate the changes are likely

to strike deals on the most advantageous terms

• the implementation of solvency 2 is likely to lead to lead to a change in analyst perceptions of insurers . some insurers stand to gain from this – particularly life

insurers writing large amounts of unit linked and pure protection business, who may

find they are much more cash generative in future . others may suffer, in particular life

and non-life insurers with significant asset-liability mismatch positions, whose balance

sheet volatility will become much more transparent to investors on a mark-to-market

basis . We believe it is important for Ceos to start thinking about how this can be

managed, and how it should be reflected in their investor communication . For example,

it may be that insurers should communicate different performance metrics externally in

order to better reflect the performance of their business . if so, now is the time to start

warming investors up to this idea .

GroWth

Growth was already looking difficult to achieve in mature markets prior to the crisis . it is

now becoming apparent that the coming years offer at best anaemic recovery prospects in

europe and at worst a double dip recession . this means that both life and non-life insurers

will need to look harder to find future sources of growth .

We see our european clients considering one of two strategies:

Domestic growth initiatives

some are focusing on pockets of growth in their domestic markets . in life, these are

likely to include decumulation products and, in some markets, corporate pensions . in

non-life, the opportunities are less clear-cut, but are likely to include telematics plus

specific distribution channels in retail, and auto-traded small business risks in the

commercial market .

some companies are going further and are looking to create demand though innovation in

order to better meet customers’ needs . however most customer centricity programs have

had little impact and we advise a more fundamental questioning of the customer promise

by applying three principles taken from our most recent research and conceptual thinking

on demand1:

• find the triggers . on the one hand insurance is about protecting what is most

valuable to us, but at the same time insurers face a mix of inertia and indifference . this

will require experimenting and thinking out-of-the-box of current business models, e .g .

in product and service concepts or distribution models

1 Adrian slywotzky: Demand (2011)


• fix the hassles . insurance is hard to touch and feel . therefore, insurers need to invest

further in fixing the hassles to make it easier to understand and deal with insurance and

improve the experience during the full customer life cycle

• Personalise . Customers look for tailored solutions, yet insurers suffer from huge

complexity even delivering today’s propositions . Finding a way to create targeted

products with flexibility while ensuring efficient delivery and administration will

become an ever greater challenge .

Compared to other industries insurers still lag in perceived innovation . this may be unfair

in many cases . But innovation will be key to create a new set of demand for growth beyond

current ceilings .

international growth initiatives

other companies continue to pursue international growth, including Asia, Cee and latin

America, but are having to think more creatively about where to compete . in particular,

most of the “low hanging fruit” in these markets have now gone: the incumbent insurers in

the growth markets have now either been acquired by global players, or have upgraded to

become stronger competitors in their own right; the most attractive bancassurance deals

in these markets have now been tied up; and the prices of the limited number of assets

which do come to market are generally bid up by competition among global insurers and

increasing interest from more aggressive local players .

european insurers are therefore having to think more creatively about sources of future

growth . For example, some aim to anticipate the next development stage in particular

markets in order to leapfrog local competitors . this could include launching products

which are at the start of their growth phase (such as variable annuities in many markets)

or focusing on channels which are expected to take off (e .g . broker channels in tied agent

dominated markets) .

Whether the focus is domestic or international, it seems to us that many insurers are still

lacking a credible growth story, and once we start to emerge from the crisis, this will

become an increasingly pressing problem for Ceos .

Business MoDel

sources of competitive advantage in insurance are shifting rapidly . the life insurance

market is increasingly converging with asset management as guarantees are scaled

back and tax advantages for life products removed . As a result, the competitive

differentiators which have sustained life insurance models for the past fifty years are

increasingly irrelevant .

similarly in retail P&C we are observing rapid shifts in consumer behaviour as customers

shop around for cover more actively and become more comfortable buying products from

alternative distributors (e .g . brandassurers, banks, vehicle dealers and manufacturers) .


this starts to place much more emphasis on traditional consumer marketing capabilities

and customer journey management rather than traditional agency management skills .

increasingly, we are seeing our insurance clients asking what the core capabilities of their

organisation are, and where they are best deployed in the emerging insurance landscape .

For example, in life insurance, some firms are starting to view themselves as pure asset

gatherers, and consequently focusing on low cost scalable administration platforms and

simpler customer propositions; others view themselves as technical specialists, prioritising

underwriting sophistication or financial engineering of guarantees . in P&C we are seeing

increasing interest in capital light distribution-focused business models . For example, in a

number of markets we have seen strong growth in “virtual insurers” who cede the majority

of risk to reinsurers, and in distributor-focused managing general agents . At a global

level, clients are considering whether they see themselves largely as portfolio managers

of local businesses, or as more centralised organisations who bring synergies and scale

economies to their international lines .

During the boom years, investors indulged insurance executives’ pursuit of undifferentiated

growth without a clear focus on competitive advantage . our market discussions suggest that

as the world emerges from the current crisis mentality, investors will be much less tolerant of

insurers who do not have a clear vision of their future business model .


fiNANCe AND risK exeCutives

As with the Ceo agenda, though crisis readiness and capital management both make their

marks, the topic of regulatory change dominates the finance and risk agenda for 2012 .

As solvency 2 moves through the gears from the theoretical, to the mechanical and now

into the practical, Chief Financial officers and Chief risk officers are looking much more

closely at how they will live with the new rules . We have divided the regulatory change

agenda into three sub-themes .

GettinG to GriPs With the nuMBers

up to now there has been so much uncertainty over the final rules that despite worrying

about their post-solvency 2 capital adequacy and doing a lot of work to address

these concerns, it has been difficult for many to produce the numbers . however, this

uncertainty has narrowed in recent months, but has been replaced with growing

disquiet over future capital levels: the combination of adverse market conditions and

more conservative regulatory guidance than originally anticipated is placing a squeeze

on future balance sheets . We expect most of our clients to spend Q1 of 2012 getting a

clearer picture of their s2 capital adequacy, and working out how to deal with it .

Levers and mitigants

that process will start with a comprehensive review of the levers available to address

inadequate solvency positions . Most CFos and Cros could rapidly cite 10 to 15 available

options including de-risking AlM positions, greater use of reinsurance, and intercompany

arrangements to improve fungibility . the hard work will be to filter out those which are not

feasible and those which are immaterial, to narrow down on a realistic shortlist . experience

suggests none of the items remaining on the shortlist will be particularly palatable (for

example, closing out asset positions which crystallise losses), and the list is likely to

contain a mixture of actions to be triggered if the external environment remains weak, and

actions to be triggered only if things get substantially worse . the final stage will then be

to put in place processes to ensure that those actions can be implemented at short notice

when needed .


validating model relevance, not just model mechanics

up to now, most companies have been focusing on building an internal model that is

aligned with the methodological guidance set by regulators . however CFos and Cros are

only now starting to consider whether what has been built is also aligned with the needs of

the business . executives are recognising that many validation exercises carried out to date

have been ‘box ticking exercises’ which have not considered the commercial implications of

methodological decisions . We are increasingly being asked to conduct more fundamental

reviews in order to ensure that there is no unnecessary conservatism built into the models

that is leaving money on the table, for example in the way management action is factored

in . such reviews can unearth significant capital savings .

MAnAGinG risK AnD CAPitAl

With so much time and effort devoted to the development of internal modelling

capabilities and the calculation of the solvency Capital requirement, many companies

have not yet decided how they will use the new capabilities to manage their business .

Cros in particular are aware of the need to implement the risk controls, governance

processes and risk organisation which at present often lack substance beyond what

has been written in draft versions of policy documents . the quantitative modelling

capabilities developed under Pillar 1 now need to be embedded in tools that help ensure

that risk is linked into business decisions: risk appetite and limits, risk reporting, risk-

adjusted performance metrics . CFo and Cros are struggling to get their organisations

to let go of the past and embrace the new world, new metrics, new processes and new

requirements going forward . Many are getting little traction, or worse, end up calculating

both old and new metrics with no one able to make any decisions based on these . those

that are doing well have laid out a clear picture of how the future will be, and have left it in

no doubt amongst their staff that the old world is dead .

nowhere are the shortcomings of the existing risk management set-up clearer than

in the management actions to be taken in response to a crisis . one of the issues

exercising Cros is a concern that if the current sovereign debt crisis really blows up,

the risk governance mechanisms will prove unable to cope with the number of issues

which need to be addressed, and the speed of response needed . several of our clients

are undertaking comprehensive fire drills and resiliency tests to the risk management

processes in order to reassure themselves that the plans are fit for purpose .


Business PlAnninG AnD steerinG

Whereas Cros we talked to are concerned about the risk and governance processes, CFos

are considering what changes will be required to the business model and key business

processes once solvency 2 comes into forces . Given changes to capital requirements

and a more economic view of the balance sheet, product pricing will need to change . For

example, many product lines will have almost zero cashflow strain which means that setting

pricing based on internal rate of returns metrics becomes meaningless . the additional

balance sheet volatility will also require changes to the approach used to manage the AlM

position . in some lines of business reinsurance will move from a financing tool to a pure risk

transfer solution which will change how much reinsurance will be required as well as the

structure of reinsurance programmes .

While there are implications across most if not all business processes, one key area that

has become apparent over the last few months is the impact on the strategic and business

planning process . Given the increased importance of diversification on the capital

requirements, diversification benefits will have a significant impact on results at a line of

business or business unit level . understanding the impact of changes to different business

plans across the group therefore requires more iterations with quicker feedback loops

within the business planning process . this represents a significant change to existing

strategic planning processes for most companies . in addition, a full solvency capital

calculation for each iteration is likely to be too time consuming to permit timely analysis of

different scenarios, so a more rapid, approximate approach will need to be used .


Chief OPerAtiNg OffiCers

Cost MAnAGeMent

Most insurers are now coming to the end of their third or fourth consecutive year of

cost reduction . Discretionary spend has already been pared to the bone; slack capacity

has been removed; and pay growth has been reined in . As a result, in the absence of

fundamental structural change, there is little scope for further savings without damaging

business priorities such as customer service levels .

our discussions with Coos suggest that the cost focus for 2012 will be in one of two areas:

either implementing structural changes to deliver step-change improvements, or on

cost variabilisation .

Clients focusing on structural changes are looking at both optimising the asset base

and removing cost drivers . on the asset side, we are seeing clients taking a fresh look

at (international) shared services, the physical footprint of the business, outsourcing/

offshoring and initiating it replatforming programs to remove bottlenecks in the legacy

it . the emphasis on cost drivers is likely to be around removing complexity, be that in

the product range/features, in channel features or in nature of customer touch points .

We see the dramatic impact of this complexity in the fact that the average life insurer

has a unit administration cost six times that of a typical asset manager while offering an

increasingly similar proposition . Meanwhile, in non-life we see 50% higher expense ratios

for average players compared to the leaders who have already started undertaking such

simplification initiatives .

the renewed focus on cost variablisation is driven by two factors . First, the uncertain

economic outlook means that if new business collapses or pricing softens further, insurers


need to be able to respond . second, for many insurers, fixed expenses have now become

one of the most important drivers of capital requirements – particularly for life insurers

who have migrated their business model to a low guarantee asset gathering model and

for those non-life insurers building capital-light businesses . Variabilising the cost base

therefore enables a significantly leaner capital model .

A range of levers are being considered . these can include:

• tactical activities such as putting in place contingency cost reduction plans in the

event of a downturn

• operational changes such as cross-skilling of staff; rebalancing the fixed/variable mix

in compensation; making greater use of contractors and temporary staff; and building

“stop on demand” points into change programmes

• structural changes such as outsourcing; shifting risk onto suppliers through contract

redesign; migrating activities to low cost locations and locations with more flexible

labour markets .

of course, many of these changes come with either a one-off cost or an ongoing cost

requirement . one of the key areas we have been helping Coos has been to understand

how much it is worth paying for this form of “profit insurance” .

Business MoDel

on page 5 we described how the Ceo agenda is turning to the future business model

of insurers . in particular, Ceos are having to think about where their business truly has

competitive advantages in the insurance value chain, and what role they see the firm

playing in the future .

For Coos the challenge is to deliver this future business model, and this is typically a

source of tension . For example, a number of our clients aspire to move to more “customer

centric” business models . By this, they mean getting closer to customers by writing more

direct business and allowing greater self-fulfilment, but also responding more quickly to

changing customer needs and requirements . Yet they are constrained by an operating

model which views insurance as an industrial process, where change programmes take

12 months to deliver, and where “test and learn” concepts are impossible to implement

because of legacy it systems and rigid operations . there is often a conflict in goals as

increased speed, flexibility or reactivity cannot be achieved without impacting cost,

quality or risk control which are often set targets on the Coo’s scorecard .

in such a situation, it is likely that a completely new operating model will be needed .

Changes in the it architecture might be needed . But more fundamentally, there will be a

need to change roles and responsibilities (for example, to align service teams more closely


with specific customer groups rather than specific activities); culture (to encourage risk

taking such as in prototyping and piloting of new ideas); and performance metrics (for

example, to track the benefits of improved service outcomes, not just the cost) .

in the most effective insurers, we see insurance Coos closely involved in the debate

about the future role of the organisation, and then translating the business strategy

and differentiators into a clear view on what the goals, trade-offs and priorities will be

for the business (e .g . low cost vs . flexibility vs . robustness), and hence into the future

operating model .

DiGitAlisAtion

As an industry, insurance is an outlier . it is, at heart, an information business yet it is perhaps

one of the industries which has been most resistant to the changes seen over the 15 years

since the advent of the internet . however, this is changing fast, and we increasingly see

“digitalisation” coming onto the agenda of insurance Coos in 2012 . What we mean by this

is to think about how technology could transform the insurance business in ways perhaps

as radical as those seen in travel, music or printed media . We believe that the successful

insurers over the next 10 years will look very different from those of the past .

there are many examples of firms who are already setting the pace, from small startups

selling life insurance through alternative social media and digital channels, through to

major incumbents who are using technology to reshape the role of their agents and the

customer experience . Perhaps some of the most radical changes are those which change

the nature of the product the customer buys . For example, a recent start-up in Germany

allows groups of individuals to come together to mutually insure one another, drawing on

the power of peer pressure and mutual trust to minimise frivolous or fraudulent claims . in

motor insurance, we believe 2012 will come to be seen as the year telematics really took off

in europe, and will bring with it completely new ways of interacting with customers as they

get real-time information on the quality of their driving, and ways to improve it .

in principle, any number of individuals within an insurance company could be tasked

with developing the digital strategy . in practice, we have found that the more ambitious

Coos are seizing this opportunity, and thereby elevating their role in the organisation’s

decision making .


A hAPPY AnD ProsPerous neW YeAr…

one thing that is clear from the discussions we have had over the last few months:

insurance companies are not entering 2012 with a clean slate . the economic crisis and

the implementation of solvency 2 are both casting long shadows over the industry,

introducing both threats and opportunities . Most of all though, they will require changes

to the ways executives think about and run their businesses . Changes to the business and

operating models are required to align the business to the strategic opportunities and in

order to make use of the technological developments and changing customer demands .

similarly changes to the business processes will be required to ensure that companies are

not only complying with regulatory requirements, but are optimising these so that they

are truly supporting the business going forward .


ABout the Authors

Fady Khayatt and richard thornton are both Partners in oliver Wyman’s insurance practice .

oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, organisational transformation, and leadership development .

For more information please contact the marketing department by email atinfo-Fs@oliverwyman .com or by phone at one of the following locations:

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+44 20 7333 8333

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+1 212 541 8100

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Copyright © 2011 oliver Wyman . All rights reserved . this report may not be reproduced or redistributed, in whole or in part, without the written permission of oliver Wyman and oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect .

the information and opinions in this report were prepared by oliver Wyman .

this report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy . this report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers . oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied . oliver Wyman disclaims any responsibility to update the information or conclusions in this report . oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages .

this report may not be sold without the written consent of oliver Wyman .

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