optimizing and balancing corporate agility for insurers · for corporate agility purposes, insurers...
TRANSCRIPT
Optimizing and balancing corporate agility for insurers
04 Executive summary
06 Addressing strategic uncertainty
07 Structuring assessments of strategic uncertainty
10 Corporate agility in successful execution of strategy
12 Taking action
14 Obtainingbenefitfrominvestmentinothercomponents
16 Practical steps for improving strategic risk management
18 Conclusion
20 Appendix 1: Explanations of strategic risk
22 Appendix 2: Explanation of strategic value - driver model
23 Appendix3:FurtherexplanationofVUCA
24 Appendix4:Value-drivertemplate
Table of contents
Optimizing and balancing corporate agility for insurers4
The speed and ability of a business to identify and react to internal and external events that could and do occur is increasingly foremost on the minds of insurance industry executives.
Optimizing and balancing corporate agility for insurers 5
Linkingformalizedriskmanagementactivitywithstrategycontinuestobeachallengefororganizationsinbothplanningandimplementation.AlthoughSolvencyIIencouragesthelinkageoftheriskmanagementsystemandinternalmodeltostrategicdecision-making,itisourexperiencethatthereisstillnoconsistentapproachbeingusedacrossthemarket.Thereisalsoalackofconsistentinvolvementbyriskmanagementprofessionalsinthoseactivitiesthatdotakeplace.
Ourconversationswithchiefexecutiveofficersandchiefriskofficersincreasinglyturntostrategicuncertaintyandhowitcanbemanagedaseffectivelyaspossible.Thedialoguedealslesswithcomplianceandmorewiththebroaderbenefitsandbusinessvaluethatcanbederived.Itisnosurprisethatthistopiccontinuestogainmomentuminaneconomicenvironmentthatisuncertainduetorecessionarypressures,sovereigndebt,thesituationwiththeeuroandmanyotherfactors.
Inthispaper,wediscusstheimportanceofstrategicuncertaintyandproposeastructuredapproachtoassessmentthatdirectlylinksriskmanagementcomponentstostrategy.Wesuggestpracticalstepsinsurancecompaniescantaketoimproveandoptimizestrategicriskmanagementtoachievetheiroverallgoals.
Executive summary
Clive MartinPartnerPhone#:44(0)2079511850Email:[email protected]
Optimizing and balancing corporate agility for insurers6
Havingagoodstrategy—andexecutingitproperly—iscriticalforsuccess;however,thatmaynotbeenough.
Theunpredictabilityofthenon-linearsystemsthatpermeatethemarketplaceisakeyreasonwhypeopleandorganizationsbuyinsuranceinthefirstplace.However,italsomeansthatstrategicuncertaintyisguaranteedformostinsurancebusinessesfortheriskstheyunderwriteandothertypesofrisktheyface.Inaworldwherecorporateinterconnectivityandsystemcomplexitycontinuetogrow,thenon-linearnatureofthesystemsinfluencesfrequencyandseverityofknownrisksandemergingrisksthatmaynotyetbewellunderstood.
People and organizations sometimes differentiate between “pure” uncertainty andotherfactorsaffectingtheirawarenessandreadinesstodealwithbusinesschallenges.TheacronymVUCAissometimesusedtorefertothevolatility,uncertainty,complexityandambiguityassociatedwithbusinessconditionsandsituations(Appendix3).ThiscanbeausefulwaytostructurestrategicthinkingarounduncertaintyandotherrelatedtermsandconceptsincludedintheVUCAmodel.Demographicshifts,changesinbeliefsorvalues,geopoliticaltrendsandvulnerabilitytocrisesareallexamplesofforceswhichdriveVUCAcomponents.
Whicheverwayitisaddressed,uncertaintycannotbecompletelyremoved,butitcanbeunderstoodinastrategiccontexttoprovidebetterinformationforthedecision-makingprocess.Moreover,organizationscanoftenimprovetheirabilitytodealwithuncertainty(eithernoworinthefuture),whichisoneofthereasonswhy SolvencyIIintroducesnewrequirementsaroundthistopic.Itmakessenseforinsurancecompaniestoperiodicallyreconsiderthewayinwhichtheydealwithuncertainty:themethodsusedandpeopleinvolved.TheintroductionofSolvencyIImayprovideanexternalstimulusforsomeorganizationstorefreshtheirapproach.
Recentdevelopmentsrelatedtoscenarioplanninghavehighlightedthat,forsomeinsurers,smarterapproachescanbetakenindealingwithmuchoftheriskanduncertaintythatcandeterthesuccessofeventhebestlaidplans.Agoodexampleistheactiontakeninrelationtoscenariosinvolvingsovereigndefault.Theimpactofaneventwasnotonlyconsideredinadirectway,butalsointhecontextofwhatelsemighthappenthatwouldlimittheavailabilityofadditionalfunds.
Addressing strategic uncertainty
Optimizing and balancing corporate agility for insurers 7
Mostcompaniesfacestrategicuncertainty,however,definitionsrelatingtothetermcanbelooseandinconsistent.“Strategicrisk”isarelatedphrasesometimesused,butoftenwithadifferentmeaning.SomeexamplesareincludedinthediagrambelowandexplainedfurtherinAppendix1:
Structuring assessments of strategic uncertainty
...riskisnotproperly considered
whendefiningstrategy?
...riskmanagementactivities are
not focused on drivers of strategy?
...managementactivity does not
keepupwithchangesinstrategy?
...strategyisnot“good” or well
enoughthoughtthrough?
...thestrategymightneedtochange?
...consequencesofnon-achievement
of strategy?
...uncertaintysurrounding
achievementofstrategy?
...incompatibility of strategic
goals, strategies, resources,qualityof
implementationandthemarket economics?
What is strategic risk?
Optimizing and balancing corporate agility for insurers8
Fromarisk-managementperspective(nomatterhowstrategicuncertaintyisdefined),itisbeneficialtouseastructuredapproachtoassessmentwhichdirectlylinksriskmanagementcomponentstostrategy.
Strategicriskassessment(andotheraspectsofstrategicriskmanagement)canbecomplexandsophisticatedinpractice.Weagreethatitshouldbe,althoughsubjecttoaneconomiclimit(i.e.,donotspendtoomuchtimeassessingriskthatdoesnotposemuchofathreat).Nonetheless,simpleapproachescanbeusedtodemonstratehowsuchassessmentscanbestructured.
Thefollowingdiagramillustrateshowaclassicstrategicvaluedrivermodel(explainedinAppendix2)canbeusedtoidentifykeyareasofuncertaintythatcouldhaveapositiveornegativeeffectonachievingoverallstrategy.
Organizationsthatundertakethisapproachhaveanunderstandingofsomeofthemaindriversofstrategicuncertainty.Managingandexecutingstrategywithdueregardtotheseuncertaintiesiscriticalandwouldappeartobeanimportantpartofincreasingthechancesofstrategicsuccess.
Optimizing and balancing corporate agility for insurers 9
Consider the key strategic uncertainties
Value drivers (thingsweneedtogetrighttoachievestrategicgoals)
Key uncertainties (thatcouldpositively or adversely affect performance of eachlever)
Value levers (tangibleitemssupporting eachdriver)
Strategic goals
Optimizing and balancing corporate agility for insurers10
Some organizations do not need to be agile to successfully implement strategies becauseriskanduncertaintyissuchthatdistractingevents(internalorexternal)donotalwaysoccur.Someinsurancecompaniesarearguablysetuptooperateinanon-agileway.Theirbusinessmodelsarenotparticularlycomplex(i.e.,fewclasses,focusedonaveryclearandspecificmarketsegment).Principaluncertaintyisbasedonexternalinsuredeventsthatarebeyondthecontrolofthebusiness(althoughtheextentoftheirexposureiswellwithintheircontrol).
However,largerinsurancecompanieswithmorecomplexbusinessmodelscanbesubjecttogreateruncertainty.Asastrategic,andinsomecasestactical,responsetothatissue,theymayhaveadesiretobemoreagileintheproductsandservicestheyoffer.Overall,levelsofuncertaintydonotnecessarilycorrelatetoscaleandbusinessmodelcomplexity.However,theeffectofnon-linearsystemsinlargercompanieswithmorepeople,productsandcustomersmeansthatuncertaintyneedstobemanagedwell—especiallyduringperiodsofchangewhenitcanbemoredifficulttoachieveresults.
Ifcorporateagilitycanbedescribedasthespeedandabilityofabusinesstoidentifyandreacttointernalandexternaleventsthatcouldanddooccur,thenthesetwoseparatetalents(“identify”and“react”)canbeappliedinastrategiccontextandattachedtothestrategicdrivermodelhighlightedearlier.
Byestimatingtheeffectofcorporateagility,thecompanycanconsideritsappetiteforvariabilityagainstitsstrategy,andmakedecisionsregardingwhatactionshouldbetakentoaddressthelevelofstrategicvariability.
Corporate agility in successful execution of strategy
Optimizing and balancing corporate agility for insurers 11
Assess ability to detect/anticipate/react to things that could make an impact
Agility factors (assessmentofthingswhichgiveuscapabilityto....)
Value drivers (thingsweneedtogetright)
Key uncertainties (thatcouldpositively or adversely affect performance of eachlever)
Value levers (tangibleitemssupporting eachdriver)
Strategic goals
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Optimizing and balancing corporate agility for insurers12
Optimizing and balancing corporate agility for insurers 13
Successfulidentificationandevaluationoftheseuncertaintiescancreatemorework.Whenanaspectofuncertaintymayhaveadirecteffectonstrategicsuccess,businessestendtowanttodosomethingaboutit.
Whetherthoseactionsrelatetoabetterassessmentoftherisk,animproveddetectioncapabilityoranincreasedabilitytoreact,opportunitieswillarise.Theseactionscantaketimeandcostmoney.Therefore,theeconomicsofimprovementsshouldalwaysbeconsideredevenifthenatureoftheuncertaintycouldmakethisdifficulttodoinpractice.
Proposedactionsforotherriskmanagementactivitycanalsobeconsidered.Ontheonehand,lackofdataandmodelssupportingthelevelsofuncertaintymightmeanthatsomeorganizationswouldratherspendmoneyonrisksthatareeasiertoquantifyormodel.Alternatively,theabilitytodemonstratewhyandhowcertainrisksdoorcoulddirectlyinfluencetheachievementofstrategycanbeapowerfuldirectorofresources.Therationaleformakingthisapriorityandthepotentialimpactonthestrategicsuccessofthebusinesscanbeaddressedatthehighestlevelintheorganization.
Inunderstandingcorporateagility,itisimportanttorememberthatsometimes(especiallyfor“blackswan”scenarios)decisionswillneedtobemadeandactionstakenagainstabackdropofchaos,ambiguityandheightenedstakeholderscrutinyandtension.
Somemightarguethat,atfirstglance,theinsuranceindustryisnotonethatmovesatafastpaceandthattheneedforstrongcorporateagilityisnotparticularlyhigh.Atamoremicrolevelthough,therearemanyexamples(suchasHurricaneKatrina,andinthefirst12monthsofthefinancialcrisesandbeyond)wherebusinesseswouldliketohavebeenabletorespondfastertoavoidissuesortoexploitsituations.Insomecases,thevalueofbettercorporateagilityisonlyrecognizedinretrospectbutitcanbeidentifiedinreal-timeorinadvance.Althoughinsurancecompaniesmaynotneedtobeasagileassomeindustries,thereisopportunityforprogressandanappetiteforgreateragilityinsomeorganizations.
Taking action
Optimizing and balancing corporate agility for insurers14
Theattachmentofuncertaintyorvariabilitycomponentstoastrategicvalue-lever-modelcanbeusefulandprovidesagoodunderstandingofhowkeyuncertaintiesinfluencetheachievementofstrategicgoals.However,furtherbenefitcanbeobtainedthroughthelinkagebetweenthisanalysisandotherriskmanagementframeworkcomponents.
In our paper, Measuring up: effective risk management in insurance companies (June2011),weprovidedamechanismforunderstandingandnavigatingfactorswhichinfluenceriskmanagementeffectiveness.Thisappliestoriskmanagementinabroadersense:people,applicationsandinsurancecompanyprocesses,suchasunderwriting,claimsmanagementandpurchasingreinsurance.
Forcorporateagilitypurposes,insurerswillbeinterestedintheextenttowhichtheframeworkcomponentsmaybeusedtoimprovethespeedorqualityofacompany’sdetectionof/orresponsetoevents(sometimesthroughtheuseofformalizedkey riskindicators).
Stress and scenario testing, reverse stress testing and contingency planning are examplesofexistingriskmanagementactivitiesthatcanprovideusefulinputtotheassessmentofacompany’sagility.Therefore,whethertheinterestrelatestostrategicuncertaintyormoreday-to-dayuncertainty,theframeworkprovidesa goodmapofriskmanagementactivitythatcanbeconsideredforitsabilitytoimproveagility.
Obtainingbenefitfrominvestmentinothercomponents
Optimizing and balancing corporate agility for insurers 15
Align risk management framework components to agility factors
Supporting risk management components (whichcontributetothequalityoftheagilityfactors)
Agility factors (assessmentofthingswhichgiveuscapabilityto....)
Value drivers (thingsweneedtogetright)
Key uncertainties (thatcouldpositively or adversely affect performance of eachlever)
Value levers (tangibleitemssupporting eachdriver)
Strategic goals
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Optimizing and balancing corporate agility for insurers16
Whichcomesfirst:thestrategyorthestrategicriskassessment?Theoretically,howcanonesetstrategywithoutproperlyunderstandingtheassociatedrisks?Wewouldsuggestthatmorecompanieshaveastrategythanaformalizedstrategicriskassessment.Mostinsurersundertakingassessmentsarelikelytobeattachingtheassessmenttotheexistingstrategy,withtheopportunitytorevisittheissueatthenextreview.
Thereisapragmaticwaytooptimizethemanagementofstrategicuncertainty.Priordiscussionswithseniorexecutivesonthistopicsuggestthefollowingsteps:
• Ensurethevalue-driverleversfortheexistingstrategyareclear—individuallyandcollectively
• Identifyandevaluate,usingscenarios,uncertaintiesthatcouldmakeiteasier(ormoredifficult) tooperatethevalueleverseffectively;andconsiderthelikelyimpactofhowthoseuncertainties are managed
• Analyzethecompany’sabilitytodetectandanticipateinternalorexternaleventsthatwouldimpactthevaluedrivers
• Evaluatethecompany’sabilitytorespondattheappropriatepacetopotentialeventsthatmightoccur
• Understandriskmanagementcapabilitiesandthecontributionmadetothecorporate agility factors
• Prioritize improvements and optimize corporate agility in relation to strategic risk and uncertainty
Practical steps for improving strategic risk management
Optimizing and balancing corporate agility for insurers 17
Optimizing strategic risk management
1. Usepositiveandnegative scenarios to identify and evaluate uncertainties surrounding thevaluelevers
2. Assess ability to detect/anticipate/respond to internal andexternaleventsthatcould occur
3. Identify and assess thecontributionmadetocorporate agility by risk management framework components
4. Prioritize improvement basedonlinktoachievementof strategy
Improvements being considered here have a direct link to achievement of strategy
Practical steps for improving strategic risk management
Supporting risk management components (whichcontributetothequalityoftheagilityfactors)
Agility factors (assessmentofthingswhichgiveuscapabilityto....)
Value drivers (thingsweneedtogetright)
Key uncertainties (thatcouldpositively or adversely affect performance of eachlever)
Value levers (tangibleitemssupporting eachdriver)
Strategic goals
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Optimizing and balancing corporate agility for insurers18
Optimizing and balancing corporate agility for insurers 19
CorporateagilityfordealingwithstrategicuncertaintycanbebetterunderstoodandenhancedasriskmanagementcollaborationbetweenCEOsandCROsbecomesmoresophisticated.Nodoubt,strategicuncertaintycontinuestobeachallengeformanyinsurancecompanies,particularlygiventhecurrentinternationaleconomicclimate.
Asorganizationsincreasinglyformalizetheirapproachtodealingwiththischallenge,more consistent market practice and involvement of specialist risk professionals couldwellemerge.Theapproachoutlinedaboveprovidessomeusefulideasforinsurersdealingwiththisimportanttopic.
Conclusion
Optimizing and balancing corporate agility for insurers20
Strategicriskisatermoftenusedthathasdifferentmeaningsforvariouspeopleandgroups.Thefollowingtableprovidessomefurtherexplanationoftheexamplesgivenintheearlierdiagram:
Examples of strategic risk definitions
Explanation of what people often mean when they use this term
Risk is not properly considered whendefiningstrategy?
Workdoneinrelationtostrategicplanningcancovergoalsandmajorfactorsthatarecriticaltotheirachievement.Riskofnon-achievementisconsidered, but not necessarily in a detailed or structuredway.Thus,strategyissetwithouttheabilitytodemonstrateafullunderstandingoftherisksinvolved.
Risk management activities are not focused on drivers of strategy?
Theriskmanagementsystemanditscomponentsmightbewelldeveloped,appropriatefortheorganizationandembeddedintothebusiness.However,thesystem(orframework)isnotexplicitlyappliedtothedriversofstrategicvalueandtherefore,theirimportancetospecificvaluedriversisnotdirectlyestablished.
Strategy is not “good” or well-thoughtthrough?
Thequalityofstrategicthinkingislacking—evenbeforetheintroductionofvolatilityandstrategicriskconsiderations.
Appendix 1 — explanations of strategic risk
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Examples of strategic risk definitions
Explanation of what people often mean when they use this term
Managementactivity doesnotkeepupwith changesinstrategy?
Theorganizationchangesitsstrategymidwaythroughaperiodtoreacttointernalorexternalevents.However,thepeople,processesandsystemsarenot/cannotbechangedquicklyenoughtobealignedtotherevisedstrategy.Therefore,thereistemporarymisalignmentofwhattheorganizationdoesversuswhatitwantstoachieve.
Thestrategymight needtochange?
Afterhavingpursuedacertainstrategy,theorganizationmayneedtochangedirection.
Consequencesofnon-achievingstrategy?
Theeffectorimpact(typically,thedownside)ontheorganizationifitfailstomeetstrategicgoals.Examplesinclude:shareholderfundingwithdrawal,ratingagencydowngrades,supervisoryinterventionandlossofkeystaff.
Uncertaintysurroundingachievementofstrategy?
Thevariabilityofoutcomesthatrevolvearoundthestrategy,andthingsthatcouldoccurwhilepursuingaparticularstrategy.
Incompatibility of strategic goals, strategies, resources, qualityofimplementation and market economics?
Thestrategyintendedclashessomehowwiththecomponentsthatareimportanttoitsachievement.Inconsistencybetweenthestrategicintentionandthecurrentbusinessenvironment.
Optimizing and balancing corporate agility for insurers22
Ourmethodologyforaddressingstrategicuncertaintyisbasedonaclassicvalue-driver-modelapproachwhichsupportseffectivestrategicdecision-makingandplanningbylinkingvaluedriversandoutcomemetricstothedecisionsbeingmade.
Themethodologyusedhelpsdeterminewhichitemsare,individuallyorcollectively,ofgreatestimportancetotheachievementofstrategicgoals.Thisistypicallygenerated by senior management in brainstorming sessions and often supported byexistingstrategymaterialswhichalreadyprovideanindicationoftherelativeimportanceofvariouscomponentstooverallstrategy.Theitemsmightrelatetopeople,systems,customerbehaviororcorporateparentsupport.
Theitems(or“strategicvaluedrivers”)assessedasbeingofgreatestimportancetoachievementofstrategyarelinkedinthediagramtoasingle“achievementofstrategy”anchorpoint.
Eachstrategicvaluedriveristhenaddressedinturninmoredetailtounderstandthesub-itemswhichareofgreatestimportancetoeach.Thesub-itemsarethenlinkedinthediagraminthesamewayasthedrivers.
Thiscanbeiterateduntilthereisasufficientlygranularimageofthelinkagebetweenvaluedriversandachievementofoverallstrategy.Thisisusefulformanagementinunderstandinghowdecisionsmadeinrelationtoasub-itemmightaffectoverallstrategy.
Ourmethodologybuildsuponthispicturebyattachingkeyuncertainties,agilityfactorsandriskmanagementsystemcomponentstothesub-items—thusdemonstratingthelinkagethroughtotheachievementofoverallstrategy.
Appendix 2 — explanation of strategic value-driver model
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Appendix3—furtherexplanationofVUCA
Components Definition
V=volatility Thenatureanddynamicsofchangeandthenatureandspeedofchangeforcesandchangecatalysts
U=uncertainty Thelackofpredictability,prospectsforsurprise,andthesenseofawarenessandunderstandingofissues and events
C=complexity Themultiplexofforces,theconfoundingofissuesandthechaosandconfusionthatsurroundanorganization
A=ambiguity Thehazinessofreality,potentialformisreads,andthemixedmeaningsofconditions;cause-and-effect confusion
TheVUCAmodelcanbeusedtonavigatefactorsanddynamicsassociatedwithvolatility,uncertainty,complexityandambiguity.Businessescanusethemodelwhenlookingaheadtounderstandwhatmightcausecorporatevaluetochangeandhowbesttomanagethosefactors.Acommondefinitionofthefourcomponentsappearsbelow.
Optimizing and balancing corporate agility for insurers24
Value drivers (thingsweneedtogetright)
Key uncertainties (thatcouldpositivelyoradverselyaffectperformanceofeachlever)
Value levers (tangibleitemssupportingeachdriver)
Strategic goals
Appendix 4 — Optimizing strategic risk management
Optimizing and balancing corporate agility for insurers Optimizing and balancing corporate agility for insurers 25
Supporting risk management components (whichcontributetothequalityoftheagilityfactors)
Agility factors (assessmentofthingswhichgiveuscapabilityto....)
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Detect/anticipate
React
Optimizing and balancing corporate agility for insurers26
Optimizing and balancing corporate agility for insurers 27
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