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BUSINESS PLAN IMMUNE TO RISKY SITUATIONS

JOANNA STARCZEWSKA, ADVISORY BUSINESS SOLUTIONS MANAGER

RISK CENTER OF EXCELLENCE EMEA/AP

ATHENS, 13TH OF MARCH 2015

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FINANCE CHALLENGES OF MANY FINANCIAL DEPARTMENTS

Strategic Planning• Planning of sales• Budgeting for expenses

• Reasonable forecasts of reserves• Investment planning

Financial consolidation

Consolidation with allowance for :

• Ownership rules

• Intra-group adjustments

• Reclassification rules

• Allocation rules

Support for various standards (localGAAP, IFRS..)

Reporting

• Consolidated annual report in accordance with

IFRS

• Consolidated annual

report in accordance with other GAAP

• Investor Relation reports

• Quarterly financial Statements

plan

plan

submit

revise

plan

submit

revise

plan

submit

revise

Bottom-up example

plan

plan

submit

revise

plan

submit

revise

plan

submit

revise

plan

plan

submit

revise

plan

submit

revise

plan

submit

revise

How to manage all of that, • being confident about quality and consistency

of data used in all areas

• Smooth the communication between allinvolved parties

• Provide the reports on time

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RISK AND FINANCE

INTEGRATIONBUSINESS REASONS

Strategic PlanningObjectives:• Achieve certain share in the market• Profitability of l ines of business• Value for shareholders

Based on assumptions on development of

portfolio and forecast of parameters describing portfolio, initial plan is created.

Then several what-if analysis are done.

BUT – SEVERAL THINGS MAY GO WRONG, some cannot be anticipated, but some can be expected.

And for the latter, insurer can get prepared.

Risk ManagementObjectives:• Ensure that projected risk position meets the risk appetite• Capital adequacy in projected years

Scenarios and stress scenarios should be used, then analysis what is the risk position for each of them and what is the impact of

management decisions

• SCR

• SCR cover ratio

For each path:• Combined ratio• Return on capital

• Growth of earnings

Risk immune Capital planning

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RISK AND FINANCE

INTEGRATIONREGULATORY DRIVERS

Need for strong integration of risk and finance are also articulated and actually expected by European regulations of Solvency II, more specifically – the ones concerning Capital Planning (in pillar II, as part of Own Risk and Solvency Assessment)

2014 2015

ORSA

(prep phase)

ORSA implementation timelines in EU

ORSA (pilot)

2016

ORSA

(final)

Report on ORSA

Capital planning includes projections of capital requirements and own funds over the

planning period (and may include the need to raise new own funds ). It is up to each

undertaking to decide for itself the reasonable methods, assumptions, parameters, dependencies or levels of confidence to be used in the projections

2.43

Any strategic or other major decisions that may materially affect the risk or own funds’ position of the undertaking need to be considered through the forward looking

assessment of the undertaking’s own risks before such a decision is taken

2.60

First report on ORSA (including Capital Planning) is expected already this year

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RISK AND FINANCE

INTEGRATIONSITUATION IN MOST OF INSURANCE COMPANIES

ACTUAL SITUATION

Most of insurers already have some tools in place that could be used for capital planning.

The issue is that they are not integrated.

Strategic Planning• There generally is

business model

• Mostly handled by MS Excel

Risk Management

• Major risks

• Risk appetite

• Scenarios

• Risk measures

Capital ManagementSimple analysis of capital Valuation ools

Actuaries

No integration,

Data discrepancies,

Issues with

communication,

xls flying around

TARGET SITUATION

• Defined aligned business models (for strategic planning, capital planning and risk management)

• Combine activities of all involved parties into one coherent process supported by integrated IT environment.

Actuaries

Business/ Strategic

ManagementRisk Management

Capital Management

• Alignment of risk indicators and model parameters

• Business objectives influence the risk appetite

Simplified, yet aligned approaches for forward-looking projection

Valuation under stresses

Analysis of impact of management decisions onto capital adequacy

Model &Technology

• Data architecture and

gover nance

• Pr ocess automation

• Modelling optimization/simplification

• Decision-making support tools

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RISK AND FINANCE

INTEGRATIONFUNCTIONS INVOLVED IN CAPITAL PLANNING

Board

Finance

Audit& Control

Capital MgmtInvestment Mgmt

Actuarial, reinsurance,Product development

Sales Management

Risk Management

Data platform and

workflow supporting

the sequence of input

required from several

stakeholders

There are even more roles (/functions) involved into elements of Capital Planning process.

It is substantial that all of them understandtheir role in the process, and impact of their actions.

IT environment should enable the processes to be clear, efficient and timely.

Clear ownership needs to be defined as well.

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APPROACH TO

CAPITAL PLANNING

COMPROMISE BETWEEN PRECISENESS AND

COMPLEXITY

In general the EIOPA’s guidelines give freedom to insurers to choose the approach for forward-looking projections.

There are several approaches considered on the market. Selection of method is always a compromise between preciseness and complexity of model.

pre

cis

en

es

s

complexity

BS roll

forward

Deterministic

BS projection

Stochastic

modelling

Actual practice shows that most of insurers start with simpler approach at the beginning and plan to develop it within the time.Such simpler approaches are suggested by Dutch Association of Insurers and (for non-life products and life without options and guarantees) by Society of Actuaries in Ireland.

From financial (strategic planning) point of view it is expected:- to have smaller number of scenarios for which

alternative strategies may be discussed- Simplified model that quickly provides input for

decision-making process

From risk management point of view it is expected:- to have models as preciseas possible- to be able to do reverse scenario

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INTEGRATION OF

RISK AND FINANCESOME IMPORTANT ASPECTS

Strategic Planning

Level of detail

• More detailed analysis of expenses• Division by sales channels• Important profit centers• Higher frequency

Approach to valuation

• Local GAAP or/and IFRS value are used

SAS FINANCIAL MANAGEMENT SAS RISK MANAGEMENT

Capital Planning

• Separate business model• Sensitive to both, management decisions

factors and risk factors

• Solvency II values are projected, however few elements (like dividends) need to be aligned with statutory values

• Comparison against statutory values

SAS CPNM

• Operates on detailed portfolios• Additional dimensions of risks,

scenarios, types of funds, • Annual frequency

• Solvency II values of Balance Sheet

Risk Management

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BENEFITS OF USING SAS SOLUTION

• Single, integrated solution for Financial Consolidation,

Reporting, Budgeting, Planning and Forecasting• Process/ close management, data validation, multiple valuation reporting

• Workflow management: submission, review, approval & distribution.

• Financially aware: advanced system for financial

reporting

• On-Demand Consolidation (in-memory)• Data, organization changes, “what-if” analysis reflected in real-time

• Predictive Analytics: Business Forecasting

• Any ERP / source: Data Integration / Transformation / Quality tools

• Supplemental Schedules: Detail planning at asset tag level

FINANCIALPERSPECTIVE

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CAPITAL MANAGEMENT

PERSPECTIVE

BENEFITS OF USING SAS SOLUTION

Integrate risk and finance • Aligns the objectives of major processes within company

Pre-defined, open business model

• Speeding up the process • Possibility of starting simplified way and

develop with time

Flexible dimensions • Enables the user to perform Qualitative Assessment and Risk Profile as well

Support for narrative report • Ease to generate the regulatory report on ORSA

Easy integration with SAS High Performance Forecast

• More advanced models for initial projections of parameters, management factors or even elements of BS

Ability to extend the functionality with „Custom analytics” which can call any calculations

• Possibility of adding the stochastic elements to the model

• Possibility of adding advanced asset allocation

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Define scenarios as

time-vectors of values

of all risk factors.

They can be uploaded as result of external

models:

- Econometric

models

- Actuarial models

- Combined models

Or entered manually.

Result:

Forecasted values of

risk factors for each

scenario and time

period

Upload Business Planning: IS, BS_stat

Step 3

Define risk

appetite

Step 4

Projection

Step 5

Analyze

alternatives

Step 2

Define scenarios

Define economic

factors

- Equity index chng

- Interest rate curves- Property index

chngDefine financial risk

factors

- Equity returns

- Interest rate curves..

Step 1

Prepare input

data @t=0

Step 0

Define model (risks,

factors, formulas)

SAS CPNMI

BUSINESS MODELPROCESS FOR DETERMINISTIC APPROACH

Upload SCR

and MCR

Upload SII Balance Sheet

Define Risk

appetite

Project (for each

scenario, each

time-period):

- Income Statement

- Balance Sheet

- SCR, MCR

- Own Funds

Test alternative

management

decisions by

changing mgmtdecision factors,

recalculate and

analyze their

influence on final

measures

(SCR_cover ratio)

Define business factors

- Chng in mortality

rates

- Chng in disability rates

- Chng in payment

pattern

- NB Ratio

- Expense ratio

- Assets mix

- ..

Upload Own Funds

Define which factors

will be used as tool for

management decisions

Define formulas for

projections incorporating

the influence of factors

Define forms, reports

and processes

Upload Constant Params

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SAS CPNMI

BUSINESS MODELSCENARIO DEFINITION

MS Office integration (Excel, Word, Powerpoint etc.)

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SAS CPNMI

BUSINESS MODELRISK APPETITE DEFINITION

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SAS CPNMI

BUSINESS MODELINITIAL PROJECTIONS

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SAS CPNMI

BUSINESS MODEL

ANALYSIS OF ALTERNATIVE MANAGEMENT DECISIONSDECISION ON INCREASE OF SALES

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SAS CPNMI

BUSINESS MODEL

ANALYSIS OF ALTERNATIVE MANAGEMENT DECISIONSMITIGATE RISK BY CHANGE IN REINSURANCE PROGRAM

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SAS CPNMI

BUSINESS MODELSAMPLE REPORT - DASHBOARD

Finally, the result of projections and tests of alternative management decisions can be encapsulated into one dashboard which presents the most meaningful information

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