From Finance Transformation to Value Transformation · Challenges propelling financial...

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From Finance Transformation to Value Transformation

20 April 2018

P&C European Actuarial Directors’ Forum

© 2018 Willis Towers Watson. All rights reserved.


Are you feeling the pressure from…

1© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

Accounting requirements

Big data requires more significant IT structure Operational risk

Audit requirements, locking down

RegulationChanging customer behaviors

Cost pressure Market disruptors

Need for real-time decision making

Increased time to close the quarter/month/year

Lower investment returns

Innovations in technology

Increased competition

Shortened cycles for budgeting

New product development


Are you feeling the pressure from…


Accounting requirements

Big data requires more significant IT structure Operational risk

Audit requirements, locking down

RegulationChanging customer behaviors

Cost pressure Market disruptors

Need for real-time decision making

Increased time to close the quarter/month/year

Lower investment returns

Innovations in technology

Increased competition

Shortened cycles for budgeting

New product development


John Morley

Agenda

© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.3

Challenges propelling financial transformation

How Vienna Insurance Group isaddressing these demands

Our most pressing problem (hint – it ends in 17)

Value transformation

Where do we go from here?

Tina Gwilliam

Bastian Kurth Werner Matula, VIG

Roger Gascoigne

Neil Bruce

Tina Gwilliam


How VIG is addressing these demands



Simple issue that might occurThe teachers case (1)


Similar situations occur in our day-to-day business

Regular and necessary work of teachers: Preparing exams!

Frame conditions: This happens on a short notice and under time pressure!

Last step of the process: Printing the

exams!

Typical issue occurring: Paper reserves are

empty!

EXAM


First solution – that does not helpThe teachers case (2)


Did you observe similar situations in your company as well?

Today issue is solved

§ Finding someone who has paper

§ Jumping into the car pick up the paper

Action point 1

Solved for a longer period

§ Taking tablet and selecting e.g. the amazon App

§ Ordering massive amounts of paper

Action point 2Months later…§ The paper is empty

again in the same situation

§ Starting action point 1

Again action point 2?


Better solution using automationThe teachers case (3)


How can you get ahead of the problem?

What happened? When deciding for action point 2: We were not ahead of the problem?

§ Paper is obviously needed on a regular basis§ So a solution needs to provide the paper on a regular basis§ New action point: Using amazon abonnement and receiving paper each quarter

§ The kernel of the original issue could not be addressed by action point 2§ After ordering the paper it was foreseeable that it will re-occur§ The characteristic of the problem needs to be addressed by the solution


A few years laterThe teachers case (4)


Will it really work?

What did we achieve?

The situation did not re-occur and the paper reserves do just increase very slightly.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Because of regularly orders paper reserves

are never used up


Vienna Insurance Group


1994

2025,000

We are the leading insurance group in Austria, Central and Eastern Europe.

More than

employees

More than

millioncustomers

Around

Group companies50

STOCKEXCHANGE

Listed on the Vienna & Prague Since

Close to

years of experience200

Represented in

markets25

Rating

with stable outlookA+

on the Vienna Stock Exchange


Poland CroatiaSerbiaGeorgiaAlbaniaLiechtenstein

At home in 25 countriesMarket leader and one of the top players in many markets


HungaryBosnia andHerzegovinaMontenegroUkraineBelarus

AustriaCzech RepublicSlovakiaRomania Baltic StatesBulgariaMacedoniaMoldova

Top

01 04

10 >10TurkeySloveniaItalyGermany

Top

Top

1

10

6

4

11

1

>10

1

1

1

1

7

77

3

2

4>10

>10

>10

2


group internal reinsurance, mainly MTPL and accident lines

mainly corporate business, property lines

Status Quo of Solvency II process before transformation


Indirect Business

Given the decentralized structure of the company standard reporting templates have been created

Direct Business

§ For one reporting date approx. 100 filled template have to be evaluated

§ The process was built on a huge set of excel spreadsheets to carry out all the required calculations


Status Quo of Solvency II process before transformation


VIG head office

Validation Consolidation

RI ACC

Company 1

Company 2

Company 3

Company n

...

...QRTs etc.


Motivation for entering into a finance transformation project


§ Reporting deadlines become tighter every year, in particular for Solvency II reporting§ Solvency II Variation Analysis as new QRT requirement§ Improvement of regulatory requirements (traceability of calculations)

§ No changes to the reporting processes for subsidiaries in the initial step§ Release professional actuarial resources for analyzing and interpreting results rather than data work§ Create a default process without human interaction and let actuaries focus on the calculations§ Motivate actuaries to allow for a new process for their productive calculations

§ Upcoming IFRS 17


Status Quo of Solvency II process after transformation


VIG head office

Land

ing

plat

form

Company 1

Company 2

Company 3

Company n

...

QRTs etc.

RI ACC

SQLResQ SQL


Phase 1: Evaluation of Status QuoThe general approach (1)

15

Series of workshops in the pre-implementation phase in order to develop a concept for the future process

Workshop series

Walking through current process

Defining scope of the future process

Identifying the minimum requirements for the future

process

Defining flexibility for the future setup

Concept

© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.


Phase 2: Starting ImplementationThe general approach (2)

16

Weekly status calls

Team requirements

Database/ IT

Reserving Tool

Implemen-tation

Current Process

Expert level Progress control

Project Management

Decision Maker & Responsibility

Chief Actuary



Phase 2: Challenging concept based on implementationThe general approach (3)

17

One-Day workshops each month during the implementation

Presentation of Status Quo

Discussing open issues

Comparison of Concept

Fulfilment of minimum requirements

Enhancements/ Changes of concept

Updated actuarial methodology

Revised processual challenges

Results of testing



Phase 2: Testing and Roll-OutThe general approach (4)

18

Ongoing during implementation & 3 additional months after finalizing the implementation

Full run through the whole process

Planning of ressources not only for the testing but also for further adjustments

Identify potential for improvement

Testing Roll-Out

1

2

3

Defining of test cases

Defining of Checks

List of successful or failed test

Pre-productive run: Roll-Out requires training

First productive run: Guaranteeing expert available (in the background)

Post-productive run: Review of the recently finished process

1

2

3



What did we achieve?Automation Environment (1)

§ Project setup via web application

§ Companies, Lines of business, Claim types etc.

§ Triangle history, Accounting date

§ Reinsurance Structure, Exchange Rates, Interest Rates

§ Data upload and import in ResQ via web application

§ Claims triangles, Claim counts, Earned premiums, etc.

§ Creation of default calculations (various ResQ methods)

§ Actuarial work in ResQ

§ Automated evaluation of the proportional RI program of VIG Holding

§ Review (sign-off) process using ResQ scripting

§ Automated roll forward and variation analysis



Own SQL Server

Excel Add-In

What did we achieve?Automation Environment (2)

20

Reporting Options

SQL



Quotes from project members involved

21

„The automation of a process forces oneself to ask: How does my calculation process look like at the moment, and how do I want it to look like ideally?“Philipp Gruber, arithmetica (VIG)

„Seeing a plant growing and harvesting the fruits is always a great story – building up VIG‘s new reserving environment and getting the feedback that it improved the process significantly is such a story.“Bastian Kurth, Willis Towers Watson

„Collaboration of VIG, Arithmetica and Willis Towers Watson went really well! The contribution of each individual’s strength made the project a success and great fun!“Laura Spiegel, Willis Towers Watson

„The team of WTW showed a great combination of actuarial skills and ResQ best practice know-how. This gives me the comfort to develop an optimal solution for my team.“Werner Matula, VIG

„With our new solution more time remains for the real actuarial work.“Wolfgang Knirsch, VIG

„Working with their IT and implementation support was great. I’ve rarely seen such skilled programmers. “Sebastian Justi, Willis Towers Watson



More snakes than ladders?

IFRS 17 for P&C Companies



The IFRS 17 journey from start to finishManaging the end-to-end process to deliver success


IFRS 17 covers more than just financial reporting. Early investment and a structured planning approach are key to managing a smooth implementation programme. Insurers that start earlier, rather than later, will be in a better position to take advantage of ensuing market opportunities and will be best placed to shape their business journey and financial performance going forward.

Workstreams

Systems – financial, actuarial, aggregation and reporting

Data – availability, provision, storage, integration

Processes – operating model, working day timetable, fast close

People – capacities, engagement, training and knowledge transfer, outsourcing

Financial – financial impact and sensitivity, investor messaging, disclosures

Technical – technical analysis of IFRS 17 and related standards

Business strategy – products, pricing, ALM, reinsurance, M&A, distribution models

Phases

Phase IProgramme set up and

gap/impact analysis

Phase IIDetailed scoping,

technical and design decisions

Phase IIIImplementation

Phase IVPre-production, financial

refinement and disclosure

Phase VProduction and

transition to BAU


Winning the IFRS 17 game of snakes and laddersFinding the ladders and avoiding the snakes


§ For P&C insurers the initial reaction to IFRS 17 was relaxed. Most of the challenges seemed around life contracts.

§ So, let’s play. Throw a double six and we’re off! And straight up a ladder!

§ But as companies have started moving across the board a number of tricky issues seem to have emerged causing P&C insurers to start questioning their approach.

§ There seem to be snakes hiding in unexpected places. But where?


Premium Allocation ApproachSo nothing changes, right?


§ Use of Premium Allocation Approach (PAA)§ Simplified methodology for short-term

contracts with no burdensome CSM§ “Almost the same” as current

Unearned Premium Reserves§ No need to go through explicit

building block calculations§ No explicit risk adjustment§ No discounting of premiums§ Applicable to all one year and most

longer contracts§ What is not to like?

§ But not as simple as it seems…§ What do “not differ materially” or “no

significant variability of fulfillment cash flows” actually mean?§ Based on premiums received rather

on due or written§ Instalment-by-instalment – big

change from current accounting in some jurisdictions§ Are systems in place to match cash

receipts to actuarial calculations?§ What about premiums due but not

collected?§ Is the choice of PAA really such an

obvious or advantageous one?


Onerous contracts and aggregation of contractsSo nothing changes, right?


§ Portfolios according to “similar risks” and “managed together” seems like homogenous risk groups under Solvency II§ No testing required for onerous

contracts under PAA – all based on “facts and circumstances”§ Onerous contracts at inception “likely to

be relatively infrequent” and “generally be the result of an intentional pricing strategy”

§ Level of assessment for onerous contracts is the individual contract or, at best, a set of similar contracts§ How far down do companies need to

dig?§ Differential pricing of new business

compared to renewals? And what about annual cohorts? Cross-subsidies between products?§ Incorporation of pricing information – is

this something that we are conditioned to do? Is the view of the pricing actuary the same as that of the reserving actuary?§ Unbundling different risks in a single

contract?


Outstanding claims


§ Best estimate cash flows§ Adjusted for risk – from the entity’s

perspective§ Discounting might be new for

statutory reporting in most cases but surely we have done that for Solvency II anyway § So again nothing new here, surely?

§ But what does the need to produce numbers by group – and where groups are formed according to annual cohorts – mean for traditional accident year reserving processes?§ Do we need to calculate on an

underwriting year basis to generate results by group?§ And tracking multiple discount rates

(where OCI option used)§ And different discount rates

depending on approach used for measuring contract (PAA or GMM)


Reinsurance


§ Explicit classification, measurement and presentation of reinsurance contracts, independent of the consideration of the underlying direct business§ Potential mismatching issues caused by § Onerous direct contracts written in the knowledge of offsetting gains from reinsurance§ Combination of BBA and PAA§ Explicit allowance for reinsurance credit risk – expected not incurred§ Aggregation – what is a portfolio of reinsurance contracts? Unbundling multi-line

reinsurance contracts?§ Consolidation issues – intra-group reinsurance needs to be fully eliminated


How to win the game?



Technical, financial and operational impacts – interrelationshipAn efficient impact analysis will do sufficient evaluation for governed, informed and quick decisions


Financial

Operational

Technical

§ IFRS 17 involves making technical choices, each of which has operational and financial impacts. § Investigating and evaluating every aspect of the

full range of options will be overly time consuming.§ However, options should not be dismissed until

they are adequately understood.§ The Impact Analysis should be structured with

interim transparent decision steps to ensure an efficient but well-governed process.


Key factors for a successful IFRS 17 implementationMany factors to consider

§ Clarity in objectives – financial, business and operational§ Informed, efficient and effective governance§ Understand the business impact (and adapt for it) – ‘start at the end’§ Stakeholder buy in to the programme§ Appropriate prioritisation and allocation of resources § Accurate information and work quality§ Clear end state process – how will you phase the transition to this?§ Aligned to and complements other business objectives over transition period§ Recognise it’s a journey – a process of continuous improvement as internal and

industry methodology is refined


What is your Business Unit’s view of IFRS 17? How and when will you form one? Do Business Unit and Group views complement each other?


Solvency numbers and a new complex P&L… but all in half of the timeHow to make this happen?


Number of weeks after year end

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Solvency II Group - 2016

Solvency II Group – 2019

Major European insurers YE2016 reporting

Financial reporting in 2021

Average, based on 5x of the largest European insurers for y/e 2016 financial reporting

?


Value transformation


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Change driversAll organisations face market and regulatory pressure and need to react

Finance, Risk and Actuarial Goals

Give more back to the business with less

More granular regulatory and accounting standards

Reporting time line constraints and convergence

The need for faster MI for timely decisions

Better quality MI for business steering

Cover more regulation with less

Organisational Goals

Market PressureCompetition and

economic environment

Regulatory PressureCustomer, Capital and accounting standards

Faster

Better

Cheaper

Profitable Sustainable

External Reporting

Internal Reporting

IN OUT


Faster, Better or Cheaper How these drivers change the end state solution

Effective industrialisation brings enhanced systems integration, governance and workflow management to the process and can be extended beyond reserving

Data Preparation Analysis Review Reporting

Early warning Pricing supportScenario testing

Uncertainty analysis


Regulatory needsValue add

Business impact


Industrialising the current reserving process can lead to…


Better Analysis

Faster Delivery

Cheaper Delivery


Can apply to more than just reservingBut requires a defined and repeatable process to maximise benefit

AdjustmentsBenchmarks

Reporting

US GAAPUS GAAP Business PlanningBusiness Planning

Product PricingProduct Pricing

Business ValuationBusiness Valuation ReservesReserves Solvency

CapitalSolvency Capital RiskRisk

Policy data Reserving tool

Claims data

Discount ratesAllocations

Example for the reserving process

To provide complete automation and integration of end-to-end reporting software

Grouping


Can apply to more than just reservingBut requires a defined and repeatable process to maximise benefit

AdjustmentsBenchmarks

Reporting

US GAAPUS GAAP Business PlanningBusiness Planning

Product PricingProduct Pricing

Business ValuationBusiness Valuation ReservesReserves Solvency

CapitalSolvency Capital RiskRisk

Policy data Reserving tool

Claims data

Discount ratesAllocations

Example for the reserving process

To provide complete automation and integration of end-to-end reporting software

GroupingIntegration and Automation

Policy data

Claims data

Cleaning Grouping

Discount rates

Benchmarks

Reserving tool

Capital model/ RA/RM

Adjustments

Planning ULRs Allocations Reporting

UY/AY/TP/ IFRS 17

conversions

Data extraction, preparation and validation Parameterisation and Analysis Report

TP data

RI data

Committee packs


IFRS 17 end to end composite solutionExample architecture


Life Cash-flows

P&C Cash-flows

Third Party Cash-flow Tools

AdminP&C

AdminLife

Assets

ESG

RI

IFRS 17 Engine

Prepare and Store

Life

P&C

SourceSystems

S2 / IFRS Results

InputData

Unify

Willis Towers WatsonRiskAgility FM

DataValidator

Star ESG

ResQ

Extract Transform

and Load(inbound D

W -S

AP

)

Extract Transform

and Load

Group Disclosure / Reporting

Statutory Reporting

Regulatory Reporting

Management Reporting

Consolidation

Local General Ledger

Generate GL postings

Perform Closing

Create BS / P&L

Local Disclosure / Reporting

Statutory Reporting

Regulatory Reporting

Management Reporting

Local Entity Group

Insurance Accounting SL

Journal posting engine

SAP, Oracle, etc. EPM layer

PBF


Unify functional overviewMarket leading and unique workflow automation and governance software design by and for actuarial and finance professionals


§ Integration – including active workflow management with WTW software solutions and third party software

§ Automation – of manual repeatable and predictable activities including monitoring and management§ Governance – including security, process review and approval, version control and audit of these

systems and processes

Three functional pillars of Unify

§ Reserving, risk and finance process industrialisation for P&C and composites§ Essential building block of the IFRS 17 solution

Key applications for Unify


Client example


Before… After…

* Slide provided by a major client

§ Improve process efficiency and resource allocation through process/system automation.

§ Eliminate end user computing§ Maintain auditable history of data,

calculation steps and sign-off processes.

§ Establish standardized reporting§ Improve flexibility and granularity

of input datato foster high quality analyses.

§ Strengthen comparability of data bases betweenpricing and reserving.

§ Offer system for proactive actuarial data management.

§ Fulfil Solvency II data and process governance requirements (incl. recommendations of Actuarial Function) and prepare processes and systems for IFRS 17.

§ A major global client bases the current non-life reserving process on ResQ as actuarial core application

§ Currently the process was supported with a lot of Excel files§ The four eyes principle is mostly realised but quite manually


Evolution of the Reserving Process§ Streamlining of the analysis stage only scratches the surface of

efficiency gains

§ A holistic approach acknowledging stakeholder needs and working across functional/process boundaries unlocks maximum benefit

§ Automation can speed up any process, and workflow can reduce inefficiencies in hand-offs between people, departments and processes

§ However, having the correct control environment can reduce the inefficiencies in changing that process to meet new challenges

Output and Review

Roll Forward

Import

Method Preparation &

Modelling

Validate

Unify


Conclusions

Tighter controls around the process, reducing key person risk and allowing easier auditing

Reducing the ability and need for actuarial intervention in the data and reporting phases

More time for analysis (unconstrained by reporting timetables and with focus on the important rather than the mundane)

Better integration with other functions, particularly finance


A well defined, repeatable process

A holistic approach to view the reserving process in context

Considering stakeholder requirements

Looking at related projects in the organisation

Determination!

But to make the most of it requires:

Process reengineering can lead to:


Where do we go from here



What does the future hold?

From Finance Transformation to Value Transformation · Challenges propelling financial...

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