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Microsoft PowerPoint - LON-MOWGM3MKT-044 _ANIA conference


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									Financial Services

                         23 October 2009

                         Structuring your Solvency II
                         readiness programme with a focus
                         on business benefits
                         Astrid Jäkel, Giorgio Marchegiani

giorgio.marchegiani@oliverwyman.com                  CONFIDENTIAL | www.oliverwyman.com


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Copyright © 2009 Oliver Wyman

With draft advice on level 2 implementing measures published,
the industry is more active than ever in its Solvency II preparations

         Setting up and conducting Solvency II readiness programmes
         – Most large insurance groups:
            Gap analyses concluded, programme set up and being executed
         – Medium-sized insurers:
            Many in the middle of conducting gap analyses to structure their
            Solvency II readiness programmes

         More focus on understanding business impact of Solvency II
         – Quantitative impact of level 2 implementing measures
           being assessed
         – Advanced insurers start thinking about what Solvency II means for
           their business model

© 2009 Oliver Wyman   www.oliverwyman.com                            LON-MOWGM3MKT-044   2
Preparing for Solvency II involves more than just building core
compliance elements

  Core elements of Solvency II              Tools and processes for        Solvency II impact on
  compliance                                managing the business          business strategy
                                            post Solvency II

                                                      Performance                    Balance sheet
           (Internal) capital model                     metrics                  structure and funding
                                                       Back book
          Own Risk and Solvency                       management
          Assessment (ORSA) and
                                                  Strategic planning and               strategy
              risk governance
                                                     capital allocation

                Regulatory and                     New product design                 Investment
               external reporting                     and priority                      strategy

                                                      Asset liability

                                                    Reinsurance and
                                                     risk mitigation

               Solvency II programmes should be set up building on the
                                                   Assessing business strategic
               company’s strategy and with a clear view of and managing impactimpact

© 2009 Oliver Wyman   www.oliverwyman.com                                                  LON-MOWGM3MKT-044   3
Your business profile and strategy is a key factor in determining
the focus areas of your Solvency II programme

                                                  Focus areas of Solvency II preparation
Example company profile
                                                  (beyond pure compliance)
Local P&C player
  A number of retail businesses (separate legal     Ensure maximum diversification benefits – may
  entities) in one country                          require consolidation of legal entities
  Some corporate business                           In the corporate sector in particular, understand
                                                    new capital requirements and ensure that you
                                                    are sufficiently funded
                                                    Solvency II-optimised investment strategy
                                                    across the business
Traditional life insurer
  Back book of traditional life products with       Managing the economic balance sheet going
  significant guarantees                            forward, possible back-book re-structuring
                                                    Product strategy: Developing products for the
                                                    new world
                                                    Investment strategy: Increase asset liability
                                                    matching and step up ALM management tools

© 2009 Oliver Wyman   www.oliverwyman.com                                           LON-MOWGM3MKT-044   4
In addition to gap analysis, vision and ambition setting should be
the starting point for a Solvency II readiness programme

                  ~10-12 weeks              ~6-9 months          ~18-24 months   After 2012

              Vision setting,                                                     Refinement
                                              Design and           Embed and
              gap analysis,                                                       and further
                                             development           implement
           programme planning                                                    development

     Define vision and ambition for
     Solvency II implementation
     – Based on anticipated
                                            Ongoing dialogue with regulator to
       business impact
                                              prepare regulatory approval
     – Considering the tools
       required to manage the
       business going forward
     Review existing capabilities
     and projects
     Gap analysis against Solvency
     II requirements and vision
     Definition of development
     needs and priorities
     Programme plan and
     business case

© 2009 Oliver Wyman   www.oliverwyman.com                                         LON-MOWGM3MKT-044   5
To make the Solvency II ambition tangible it is key to show how
core metrics and decision tools will change early on        Disguised
                                                                                                                                                         client example

              Group - Management Information Dashboard
Old Mutualfor Solvency II-compliant Management Information dashboard
Client vision          Solvency II SCR as core capital metric
                      Economic Profit                                                Economic Requirement
                                                                              Solvency Capital Capital                                            EaR
   250                                    Budget            8.0%                                                     Budget    1,000                                  Limit
   200                                                      6.0%      4,000                                                      800
   150                                                                3,000                                                      600
                                                            4.0%      2,000
   100                                                                                                                           400
    50                                                      2.0%      1,000
     0                                                      0.0%                                                                   0
                                                                                Q4           Q1   Q2         Q3         …
           Q4      Q1         Q2     Q3        …                                 ALM              Market             Credit             Q4      Q1      Q2     Q3       …
            Economic Profit            Budget (LHS)                              Liability        Bus.               Oper.
            RoC (RHS)                                                            Ccy              Budget                                             Risk Appetite Limit

                               Cost of cap.            10%

                Market Consistent Profit                                        Sales by product vs. budget                            Lapse rates for lifeRisk
                                                                                                                    Status    10.0%
 Profit as
 200                                                                  P2                                             79%
                                                                                                                               4.0%                      to be        Target

                                                                      P3                                             97%
   0                                                                                                                           0.0%
       Q4       Q1          Q2             Q3               …         …                                                                 Q4     Q1       Q2     Q3              …
 metricMarket Consistent EV Profit                 Budget                        YTD                       Budget                                                Target

                                                                      Triggers (% of limit)
                                                                         Red       100%                                         Green        75%
                                                       Core             Amber trends to
                                                                   risks and        90%                  be reported          on Blue        50%
                                                       (also in ORSA)

© 2009 Oliver Wyman    www.oliverwyman.com                                                                                                            LON-MOWGM3MKT-044            6
Capturing the business benefits of Solvency II requires
a clear business case                                                                                         Disguised
                                                                                                         client example

                                                                                                  RoEV impact
Application in…                             Opportunity                                           (% EV)
Capital allocation                            Allocate group resources to the most promising      ~ 0.5%
                                              opportunities on a standard basis

                                              Manage business within group risk appetite and
                                              return ambition
Life product design and                       Focus on those product segments where the             ~ 0.5%
pricing                                       economic profitability is sufficiently high; redesign
                                              products to optimise economics

Asset/liability                               Within the a clear balance sheet management         ~ 1%
management                                    set-up, optimise the asset liability mismatch
                                              position and investment strategies

Total                                                                                             ~ 2%

                                                          Significant value uplift relative to
                                                          average RoEV of ~12%

© 2009 Oliver Wyman   www.oliverwyman.com                                                             LON-MOWGM3MKT-044   7
Most of the benefits (>60%) arise from the final 35% of SII-related
investment                                                    Disguised
                                                                                                      client example

                                                                                            World class at
                                                                                            risk and capital
                                                      35% of costs
                                                      60% of benefits
                                                                            Solvency II programme
Annual EV profit uplift

                                                                        Downside protection only

                                                            Solvency II compliance

                                          Bare minimum (Standard formula only)

                          Do nothing

© 2009 Oliver Wyman        www.oliverwyman.com                                                      LON-MOWGM3MKT-044   8
Solvency II vision, gap analysis and business case are the
foundation for the programme plan
                                                       2009                           2010                            2011                           2012
                                            Gap analysis
               Framework and                  Vision a. blueprint
             programme design                Programme design a. set-up                        Vision setting, gap
              and management                                                            Ongoing programme governance & management
                                                                                               analysis, blueprinting and
                                                                               Ongoing monitoring of requirements and communication with regulator

                                               Capital model design
                                                                                               programme structuring
 Pillar 1
                                                                                               must be
                                                                           (Internal) model build and roll-out based on an
              Capital modelling
                                                                                                                Model potential
                                                                                               assessment ofvalidation
                                                                                                                                                Regulatory approval
                                                                                               business benefits
                                                           Risk appetite
 Pillar 2
                                                                           Org. & gov. design and implementation
              Risk goveranance
                                                                                                   Limit setting
                                                          Design a. start your
                                              It is important to development of risk reports
                                              Solvency II programme
                                                              Metric design
                                                                          Pilot a. refinements
                                              now – starting too late Embedding: Strategic planning and capital allocation
            Risk-based steering               significantly decrease                        Embedding: Product design and pricing
                                              impact and increase cost                                       Embedding: Asset management
                                                                                                                                Embedding: Reinsurance
                                              (as observed in Basel II)
                 Regulatory                                 Ongoing dialogue on requirements
               interaction and                                                                 Own risk and solvency assessment
                 compliance                                                                      Preparation of regulatory review
                                                                                                  Design of regulatory reporting
Pillar 3          External
                                                                                                                Design of external disclosure
                                                                                                                                         Implementation of external rep.
                                                       Solution design
                                                                                         Design of end-to-end processes
              Operating model
                                                                           Data & IT standards def.   Review of BU data & IT
                                                                                               Improvement of current IT capabilities

© 2009 Oliver Wyman   www.oliverwyman.com                                                                                                       LON-MOWGM3MKT-044          9
Recommendations for your Solvency II programme planning
and delivery

       Design your Solvency II programme with an understanding of
       business impacts and business benefits to be captured
       – Vision setting as important as gap analysis
       – Should be conducted or started now
       Lay out a clear business case, showing costs and benefits of what
       you are planning to do
       Make key outputs of the SII readiness programme tangible early on
       Assign clear business owners for each of the key SII deliverables
       and ensure that resources to deliver are in place
       Plan and manage the programme carefully – management of
       dependencies is a key complexity we observe
       Don’t underestimate change management – the work of explaining
       and convincing never ends and every audience needs a
       different angle

© 2009 Oliver Wyman   www.oliverwyman.com                      LON-MOWGM3MKT-044   10

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