Accenture 2015 Global Risk Management Study: Paths to ...

Accenture 2015 Global Risk Management Study: North American Insurance Report

Paths to ProsperityChoose Risk and Return

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And, although regulatory pressures have been less acute than for their peers in Europe and Asia Pacific, external scrutiny from policy makers and legislators is becoming more intense.

Across the industry, many insurers have successfully laid the foundations for mature and value-centric risk functions. Risk management has grown in maturity and become more integral to business strategy. In Accenture’s 2015 Global Risk Management Study, 88% of North American insurance respondents say that the Chief Risk Officer (CRO) is involved in decision making for strategic planning and 86% say the same about the CRO’s role in business model change (see Figure 1). This level of involvement is higher than in other parts of the world, where 73% on average are involved in strategic planning decisions and 67% are involved in business model change decisions.

Rahim Hirji, Executive Vice President and Chief Risk Officer at Manulife, says that the risk function in his organization is already playing a more strategic role in the business. “There has been a shift from reducing risk to optimizing risk,” he says. “Since 2013, the

company has been more disciplined about integrating our risk appetite framework into strategic planning and decision making.”

In our view, CROs today have an opportunity to continue to position their functions as strategic advisors in support of key decisions around mergers and acquisitions (M&A), product strategy and new distribution channels. As well as traditional remits such as reporting and compliance, they should also focus on creating new value and helping the leadership team to make well informed, risk-based decisions. “Risk management will become more and more of a differentiator,” says Robert Rupp, CRO at The Hartford. “Those who are good at it will differentiate; those who aren’t will wither.”

To contribute additional value to the senior team, we believe risk functions should be able to provide insight into decision making across the business as well as into the market and its readiness for business ambitions. As we discuss in greater detail below, risk functions also need advanced capabilities in data and analytics to support new digital-enabled approaches to the market.

Figure 1. How involved is the CRO in the following aspects of your organization’s decision-making process?

Source: Accenture 2015 Global Risk Management Study – North American Insurance respondents

Key decision maker Among the decision makers

Digital initiatives

Business model change

Strategic planning

38% 42%

38%48%

30%58%

3

2

1

Risk management in North American insurance: building toward a strategic business partnershipRecent years have not been easy for North American insurers. In the wake of the global financial crisis, interest rates have remained low across regions, levels of investment have been limited, and the industry has become increasingly competitive.

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A challenging backdrop, but appetites for risk are growing North American insurers are operating in a mature and highly competitive commercial landscape in which increasing market share remains a struggle. A low interest rate environment and volatile investment returns have caused problems, as have operational challenges, such as complex legacy IT systems.

Looking to the future, regulatory requirements are expected to grow. While North American financial firms have experienced their share of regulatory challenges over the years, these have arguably been more manageable than in other regions, particularly Europe. Today, the risk landscape is changing and North American insurers must continue to manage federal and state-level regulatory obligations. They must prepare for new requirements, such as the Own Risk and Solvency Assessment (ORSA) reports that are required by the National Association of

Insurance Commissioners (NAIC) in 2015. In 2018, Internationally Active Insurance Groups (IAIGs) in the region will also need to implement the supervisory standards stipulated by the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), which will have uncertain impacts on the industry.

Taken together, these should be powerful challenges for insurers to overcome. Despite this, risk appetites are growing in the North American insurance industry.

This is particularly true for alliances and partnerships, and new product development (see Figure 2). Insurers in the region have turned their attention to growth, and are determining the best opportunities to which resources and capital should be allocated. To support these growth ambitions without stifling them, we believe the risk function should test new initiatives against established measures, policies and controls, to keep them within the limits of the agreed risk appetite.

Figure 2. Compared with two years ago, how has your senior management’s appetite for risk changed when it comes to decisions made in the following areas? (Represents percentage who say greater risk appetite)


60%

34%

42%

45%

38%

39%

38%

39%

36%

41%

34%

32%

Geographical expansion

New product development

Alliances and partnerships

Mergers and acquisitions

Major digitalinitiatives

Business modelchange

North America Rest of the world

1 2 3 4 5 6

4

North American (NA) insurance respondents to the Accenture 2015 Global Risk Management Study* show:

Risk management in the North American insurance sector

*Acc

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re 2

015

Glob

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Man

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ent S

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– N

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Am

eric

an In

sura

nce

resp

onde

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**Ac

cent

ure

2015

Glo

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isk

Man

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– In

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of NA insurance respondents have greater risk appetite for new alliances and partnerships (34% for all surveyed insurers**).

are more open to new product development risks.

Growing risk appetite

of NA insurance respondents say the CRO is a strategic planning decision maker.

say the risk function finds it challenging to gain the trust of the business to advise on operations.

Decision influencers

of NA insurers have a greater risk appetite for digital initiatives (39% for all surveyed insurers**).

agree that digital presents a major source of new risks.

Approach to digital

of NA insurance respondents say the CRO has very frequent interaction with the CFO.

think digital is an opportunity to present the risk function as a business partner.

Stronger partnerships

of NA insurers say the CRO is a key decision maker in major digital initiatives (26% for all surveyed insurers**).

say they have knowledge and understanding of digital technologies.

Enabling digital transformation

of NA insurance respondents are still at the early stages of using data in day-to-day operations.

say risk analytics is applied organization-wide.

Data and analytics

say social media expertise is the most in demand skill.

say insight from risk analytics is not yet available to support key business questions.

60%

42%

88%

72%

38%

74%

22%

86%

38%

93%

34%

76%

10%

40%

5

The need for a stronger focus on customer-facing digital initiativesNorth American insurers are already facing digital disruption and this can only increase in the near future. According to Accenture’s 2014 Digital Innovation Survey, the vast majority of insurers believe that digital technologies are transforming how the industry creates value and interacts with customers.1

New business models – whether peer-to-peer insurance inspired by the sharing economy, personalization enabled by in-vehicle telematics, or predictive analytics drawing on customer data – have created new opportunities. At the same time, these technologies pose new threats. More than three quarters (76%) of North American insurers agree that digital technologies present a major source of new risks for the organization (see Figure 3). Some of this competition is likely to come from outside the sector. Disruptive market entrants, particularly from the technology sector, can draw on their extensive customer data and use advanced digital capabilities to provide the intermediary role between customers and underwriters traditionally taken by insurance companies.

There are signs that North American insurers are not doing enough to meet this challenge. Only 38% of respondents have greater risk appetites for major digital initiatives (see Figure 2). This level of appetite is slightly lower than insurers in the rest of the world. We believe insurers will only have a narrow window of opportunity to head off the threat from disruptive new competitors. Investment in customer-facing digital technologies should form a core part of their defense – as well as being a major source of potential growth.

“Financial institutions are now seeking growth and differentiation and a lot of their thinking needs to have a digital flavor to it,” explains Richard Lumb, Group Chief Executive Officer for Financial Services at Accenture. “As well as being a major growth opportunity, digital can be a powerful tool to reduce the cost to serve, because a transaction on a digital channel is significantly lower than it would be with an agent.”

Figure 3. Please indicate whether you agree with the following statements.

Strongly agree Slightly agree Disagree slightly Disagree stronglyNeither agree nor disagree

In the context of risk management, digital (e.g. analytics, cloud, web-based technology, big data) is just a management fad

36% 32% 24%

We are considering or have implemented digital-oriented projects for risk 40% 14% 4%42%

Digital is a major source of new risks for the organization 28% 18% 6%48%

Digital is an opportunity to present the risk function as a business partner 36% 10%

2%2%

50%

4%4%


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Figure 4. How would you describe the interaction between your organization’s CRO (or equivalent) and the CFO?

Very frequent Quite frequent Minimal Don’t knowAd hoc

Rest of the world 32% 45% 18%

North America 60% 10% 6%

1%

2%

4%

22%


Risk management to play an active role in digital transformationAs leading North American insurers prepare new customer offerings enabled by digital technologies, risk management cannot stand on the sidelines. It should play an active role in assessing the opportunities and risks and in helping organizations steer the right course.

Doing so will mean building on its position as a strategic business partner at board level. For now though, many North American risk functions are at an early stage of this transition. Only 38% of North American insurers say that their CRO is a key decision maker in digital initiatives (see Figure 1).

Many CROs in North American insurance are striving to reposition risk management as a credible partner in enabling growth strategies, rather than being perceived as a function that is sometimes seen to impede growth initiatives.

Across several key areas of the business, however, many North American insurers have been slow to adopt the partnership approach their risk functions are seeking. The majority of respondents think that the connection between risk and finance could be improved, for example, with just 22% saying that their interaction with the CFO is very frequent, compared with 32% in the rest of the world (see Figure 4). Almost a quarter (24%) say that risk and capital models are developed largely independently within the risk and finance functions (see Figure 5).

Technology will be a powerful tool to accelerate the shift towards stronger relationships with the business. For example, CROs are encouraged to do more to integrate disparate risk and finance data into a platform that promotes an enterprise-wide view of exposures. This can facilitate more efficient reporting, better decision making, and the ability to provide more robust insight to the business. Almost nine in ten respondents in our survey (86%) see digital presenting a significant opportunity for risk to work with the business as a partner – with half saying they feel strongly that there is a real opportunity here. This is higher than the 35% of insurers from elsewhere in the world who feel the same way.

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Figure 5. Which of the following statements best describes the insurer’s stage of maturity in terms of coordination between risk and finance on risk and capital models?

Please indicate where the insurer’s risk function currently performs on each scale using scores between 1 and 5.


18%

24%

10%

11%

16%

18%

24%

21%

24%

1 2 3

34%

4 5

Risk and finance coordinate closely on the development and maintenance of risk and capital models, which are used to drive day-to-day business decision making

Risk and finance coordinate closely on the development of risk and capital models, but the outputs of these models do not drive day-to-day business decisions

Risk and capital models are developed largely independently within the risk and finance functions


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In our view, as North American insurers take on new challenges, operational or non-financial risks – which relate to business processes, people, systems, external events and project risks – are becoming increasingly critical.

Renewing the emphasis on operational risk management

It’s not a given that we have to do anything like the banks have done, so we’ve got a lot of different views on how to implement it. We’re now looking to refine our approach and make sure it’s comprehensive across the organization. That will include putting in place a robust, mature operational risk program. The operational risk management program needs to drive near-term business value in order to be sustainable.”

Charlie Philbrook, CRO at John Hancock

Whenever insurers evolve their business models, for example by using new distribution channels or groups of agents, fresh operational risk exposures emerge. Any new process or technology, for example, inevitably involves a period in which staff are unfamiliar with how it should be run. People can make mistakes or overlook important stages of the process - and this can lead to new operational risk exposures for the insurer to consider.

Operational risk management is particularly important for initiatives that use digital technologies to create new customer offerings. It is also key during times of business change, such as post-merger integration or other major transformation programs. These investments will expose insurers to new, unfamiliar risks, such as risks associated with social media, and therefore the emphasis needs to be on putting in place a robust operational risk framework from the outset.

More attention needs to be given to operational risks in these new areas than in more mature parts of the business.

In the banking industry, Basel III obligations are mandating a specific approach to operational risk management. Insurers do not face the same pressure and are not currently seeking a regulatory outcome from their approach to operational risk (although this may follow in the future). They can therefore adopt a more value-oriented approach, while at the same time paving the way for potential regulatory obligations in the future. Insurers that do this now will find themselves well positioned to deal with change in the future.

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Figure 6. To what extent does your risk management function have talent with the following types of skills? (Represents percentage who say they have skills to a great extent)



Modeling 67%

35%

42%

55%Communication and negotiating skills

46%

0%Commercial knowledge

Understanding of cyber risk44%

35%

53%

49%Data management

Social media skills and knowledge35%

32%

67%Forecasting

28%

29%

33%Data analysis

41%

56%Business analysis skills

43%

52%

Knowledge and understandingof digital technologies

Investing in the right breadth of capabilities

North American insurers are relatively confident that they have many of the core risk management skills and capabilities they need. They tend to be more confident than their peers in other regions that they have the appropriate forecasting and modeling skills in place, for example (see Figure 6). But they are much less confident that they have the right commercial knowledge.

In our view, risk functions should look for specialists who have operational as well as risk backgrounds and therefore a clear understanding of wider business challenges and pressures. Increasingly, they will also need people with the skills in data and analytics to give timely insights into evolving issues.

To address evolving risks, North American insurers are currently recruiting non-traditional and specialist skills on a significant scale (see Figure 7). For some insurers, finding these specialist skills is proving difficult, as Bill Marsh, VP of Non-Financial Risk at Pacific Life Insurance Company explains. “We can obtain strong candidates with financial skills but face challenges finding candidates with non-technical broader, operational and governance risk skills,” he says.

At the same time, other insurers are looking to improve the risk team’s interpersonal skills. Mark Verheyen, Senior Vice President & Chief Risk Officer at CNA, says he has been developing his talent to be more communicative. “I am looking to grow talent to more effectively communicate. Individuals with a quantitative base that can communicate effectively provide significant value. It has also been helpful to look at sharing skills and talent between underwriting and reinsurance to help increase our skills and perspectives within my team.”

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Figure 7. Which of the following types of specialists has your risk management function recruited in the past two years?



Accountants 48%

40%

38%

49%Cyber risk experts

40%

32%Regulators

Strategic planners 44%

51%

44%

41%Quants/risk modelers

Former hackers 38%

50%

48%Fraud experts

40%

38%

50%Data analysts/scientists

Lobbyists30%

35%

Professionals from outside financial services

30%

38%

57%

48%Security specialists

42%

48%Business analysts

Some insurers are looking outside the firm to find the right talent to address the need for deeper operational risk capabilities. Other surveyed insurers suggest importing specialized resources from the banking industry, but looking to

other financial services industries presents its own challenges. For example, would the more prescriptive nature of banking risk requirements be an issue in transitioning such risk skillset to the insurance sector?

We monitor social media for potential risks. However, we also see this as an opportunity to be closer to consumers. Understanding how consumers are interacting and viewing the company provides valuable, real-time information, which enables us to respond quickly to people’s needs or complaints.”

Rahim Hirji, Executive Vice President and Chief Risk Officer at Manulife

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Figure 8. How would you describe your risk management function’s use of data and analytics in addressing the following types of risk?


Extensive Moderate

Liquidity risk 50%30%

Fraud/financial crime 44%34%

Cyber/IT risk 36%42%

Market risks (e.g. equity, FX, commodity) 48%28%

Outsourcing provider failure 48%26%

Market disruption from new technologies 48%26%

Credit risks (e.g. credit, counterparty) 44%30%

Government fiscal crises 34%38%

Employee malfeasance 32%38%

Business risks (e.g. changing margin) 46%24%

Strategic risks (e.g. new products or services) 40%28%

Underwriting risk 34%34%

Legal risk 38%26%

Political risk 40%20%

Reputational and brand risk 36% 46%

Regulatory risk 44%36%

Operational risks (e.g. processes, people) 46%36%

Increasing the focus on data and analytics

The insurance industry has always relied on data and analytics to price risk and analyze trends. In recent years, however, advances in analytics, along with in-memory computing, big data, and other new technologies, have created new opportunities to use these tools within the risk function.

While most insurers are using data and analytics within the risk function – particularly in some of the more traditional financial risks, such as market and liquidity – only a minority are doing so extensively (see Figure 8). When asked about the challenges impeding the overall effectiveness of their risk function, respondents point to the “three Vs” – variety, velocity and volume of data – as the number one obstacle (see Figure 9). More than nine in ten say that improving the accuracy and integrity of data is either critical or important.

Robert Rupp at The Hartford believes the insurance industry is behind other financial services industries in its use of analytics. “Insurance is still at the start of a maturity curve,” he says, “on which banking has progressed tremendously over the last five to eight years. I see great potential for dramatic change in the use of analytics to measure and predict risk, both to protect the business and to build a stronger risk position into key business decisions.”

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Figure 9. To what extent do each of the following challenges impede the overall effectiveness of your organization’s risk management function? (Represents percentage who say to a great extent)


Increased velocity, variety and volume of data

Managing emerging digital risks

Talent and skills shortages

Imperatives to maintain near-term profitability

Balancing the responsibilities for controls and compliance with need for a more commercial mindset

Lack of budget to make necessary investments

Gaining the trust of the business units to advise on operations

Lack of integration with other business functions

Insu�cient talent in the risk function

Lack of engagement with risk issues from senior management


46%

35%

32%

21%

30%

32%

24%

23%

32%

22%

Balancing need for local compliance with expectations to be a global institution

34%

30%

Lack of connectivity across existing technology infrastructure

34%

23%

32%

22%

42%

28%

26%

31%

19%

38%

34%

18%

In our view, North American insurers need to get to grips with both internal and external data to find ways of differentiating themselves, yet data and advanced analytics (for example to optimize pricing or underwriting) remain an area of weakness for many. Just 10% say that the use of data and analytics is fully integrated into the risk function’s everyday operations. The same proportion says that risk analytics is applied consistently across the organization and can help address all relevant risks and exposures. Furthermore, only 4% of respondents say that risk analytics is integrated with strategic planning and decision making (see Figures 10 to 12).

We believe the principal barriers to analytics maturity are around accessing key data, as well as learning to use that data to design and implement a risk model that reflects the business issue. Many risk functions still need to develop a closer relationship with the business in order to access the data they need and to model it accurately.

One important goal for investing in data is timeliness of reporting. “We are making investments in company-wide data warehousing and risk data aggregation, primarily to increase the timeliness of risk reporting,” says Rahim Hirji, at Manulife. “In the past, it would take weeks to produce risk reports after quarter end. Today, these reports are produced earlier and there is an increase in the use of real-time estimates, which enables more responsive business decisions.”

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Figure 10. Which of the following statements best describes the insurer’s stage of maturity in terms of integration of analytics into the risk function’s everyday operations?



The use of data and analytics is partly integrated into the risk function’s everyday operations

The use of data and analytics is fully integrated into the risk function’s everyday operations

We’ve only just begun to integrate the use of data and analytics into our everyday operations

10%

5

14%

4

34%

3

14%

2

28%

1

Figure 11. Which of the following statements best describes the insurer’s stage of maturity in terms of application of analytics across the organization?



Risk analytics is applied across the organization for some types of risks and exposures

Risk analytics is applied consistently across the organization and can address all relevant risks and exposures

Risk analytics is primarily applied locally and inconsistently

10%

5

10%

4

36%

3

24%

2

20%

1

15

Figure 12. Which of the following statements best describes the insurer’s stage of maturity in terms of integration of analytics with strategic planning and decision making?



Risk analytics is integrated with strategic planning and decision making

Senior management is primarily a passive user of risk analytics, so the outputs are shaped by the risk function

For some key business questions on which more insight is needed, relevant timely outputs from risk analytics are not yet available

4%

5

8%

4

28%

3

20%

2

40%

1

Conclusion

The digital transformation of the insurance industry will be an important testing ground for this transition. Insurers in the region have been pioneers of digital innovation in the past and there is no reason to expect that they cannot capitalize on these opportunities in the future. To do so, however, urgent action is required.

As North American insurers start to explore the introduction of new digital products, services, and operations, operational risk exposures are increasing. Frameworks need to be revisited and enhanced to provide the right scale and controls for insurers to operate effectively into the future. CROs are encouraged to play a vital role in this.

They will also need to strengthen collaboration with the business and be the facilitators of more robust decision making. They are encouraged to strengthen their teams and have the specialist skills to address a range of core activities, including modeling, risk analytics and operational risk, as well as digital technologies. Regulation also needs to be considered proactively and new governance frameworks and data enhancements put in place. Insurers have made progress across all these areas, and have done so without the regulatory requirements that prompted banks to upgrade their own operational risk capabilities. Nevertheless, they can still do more. Taken together, these developments will cement the CRO’s position as a true strategic business partner and enabler of profitable business growth.

Relatively strong economic conditions and a favorable, less intrusive regulatory environment (in comparison to Europe) in recent years have given CROs in North American insurers the opportunity to play a more active role in strategic decision making.

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AcknowledgementsWe would like to thank the senior executives from organizations in North America who took part in our qualitative interview discussions and participated in our survey. We are grateful for the input of senior staff at each of these organizations:

CNA John Hancock Manulife Financial Pacific Life Insurance Company The Hartford

We would like to thank the following Accenture executives who also contributed ideas and guidance to this effort:

Duncan Barnard (Boston)Steve Culp (Chicago)Gary Fink (Philadelphia)Chris Johnston (Chicago)Susan Neff (New York)Gerry Roop (New York)

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The Accenture 2015 Global Risk Management Study is the fourth edition of our study first published in 2009. It is based on a quantitative, online survey conducted by Longitude Research on behalf of Accenture between November 2014 and January 2015 among 470 senior risk management executives involved in risk-management decisions.

About the Research

Company size Total

Between US$1bn and US$5bn 235

Revenues over US$5bn 235

Total 470

Respondent Roles Total

Chief Risk Officer 141

Chief Executive Officer 78

Chief Financial Officer 147

Chief Compliance Officer 28

Other C-Suite 76

Total 470

Participants came from the banking, capital markets and insurance industries with 150 respondents from Asia Pacific (32%), 170 respondents from Europe (36%) and 150 respondents from North America (32%).

We also conducted in-depth interviews in 2014 and 2015 with senior leaders from 50 leading organizations across regions. They provided supporting insights for our data-driven research, while presenting useful perspectives from companies in each industry.

This North American Insurance Report presents the insights and perspectives captured from 50 insurance industry executives from the life insurance, property and casualty insurance, and reinsurance areas, including in-depth qualitative interviews with senior insurance executives.

Financial Services Respondents

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1 “The Digital Insurer – Accenture Digital Innovation Survey 2014.” Access at: http://www.accenture.com/us-en/Pages/insight-insurers-seizing-opportunities-digital-transformation.aspx

Reference

http://www.accenture.com/us-en/Pages/insight-insurers-seizing-opportunities-digital-transformation.aspx




Copyright © 2015 Accenture All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with approximately 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

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This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals.

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