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GeneralInsurance

Costs vs. growth How CFOs can strike

a balance

The future of captives

Opportunities and challenges through

to 2020

PERSPECTIVES ON THE GENERAL INSURANCE INDUSTRY IN THE UK

AUGUST 2015

“The race is on. Have you got your

foot on the throttle or the brake?”

JOURNALJOURNALInsights into a changing market

Simon Burtwell

Welcome

Contents

“With increasing global opportunities comes a greater level of scrutiny.”

2 General Insurance August 2015

Former rally driver David Richards CBE once said: “It’s easier to get a driver at 11/10ths to hold back than it is to get a driver at 9/10ths to find the extra pace.” In many ways, this rings true for the general insurance market. Many

insurers are operating at capacity while trying to find that extra ingredient to make a tangible difference to their business performance. Meanwhile, they have to navigate the ever more complex road ahead in a prolonged soft market, with more demanding customers, higher levels of regulation and increased competition.

Within this publication, we not only highlight challenges general insurers face over the coming year but also opportunities that we think have the potential to make a real difference.

One challenge for insurers is how to grow their business while this soft market endures. In our latest Global Insurance Customer Survey, only half the UK respondents had a complete or moderate level of trust in their insurer, compared with 70% of global respondents. In this publication, we use these results to discuss what you can do to improve your customer’s experience, to develop existing relationships as well as build new ones.

As the economy recovers, the Government is starting to recognise how much the insurance industry contributes to the UK economy. Governmental bodies are becoming much more willing to work with the industry to tackle some of our biggest issues and help make our economy more globally competitive. One such initiative launching soon is Flood Re, and we talk to its CEO about its evolution and future plans.

Insurers have responded encouragingly to increasing globalisation in recent years and are exploring opportunities that it presents. However, with increasing global opportunities

comes a greater level of scrutiny and this can be seen in the area of tax. Global tax changes, driven by the OECD and its BEPS project, are now moving at a rapid pace and the UK Government’s early move with DPT threatens trial by the court of public opinion for anyone found guilty of sophisticated tax structuring (despite its legitimacy). Tax is no longer just an issue for a firm’s tax function; the changes proposed are likely to affect insurers across their commercial, financial and operational functions. This is a big shift, and we look at what insurers need to assess and remediate in order to comply.

A general insurance publication wouldn’t be complete without a look at growth opportunities. For some, that growth stems from continued M&A activity, primarily in the specialty, reinsurance and broking sectors. A challenge to this growth is self-insurance, and we take a look at the use of captives. Some might be surprised to learn that growth is also a priority for finance leaders, as indicated by our recent CFO Survey, either in the form of M&A activity or expanding into new markets.

Any growth, though, will be tempered by the need to meet regulatory requirements. While having to contend with a soft rating environment, the insurance industry also faces challenges of regulation, a thematic review into the sale of add-on products for retail customers, continued focus on conduct risk and finally the (late) arrival of the Solvency II regime. We provide a perspective on these important regulatory initiatives.

So, the race is on. Whether you are an insurer, broker or service provider, have you got your foot on the throttle, or the brake? Either way, think of this publication as your pacenotes for the journey ahead.

As always, if you would like to discuss any of the topics within this publication, please do not hesitate to get in touch with me or any of the other contributors.

4 Let’s communicateWhy do customers have so little trust in insurance companies?

6 Overcoming new obstaclesTraditional ways of achieving change are not enough.

9 Extra, extra!How the FCA’s focus on general insurance add-ons will affect the sector.

12 Turning the tide on claims outsourcingOptimising the claims operating model using a combination of onshore, nearshore and offshore centres.

16 Striking a balanceFinance leaders must weigh up their two top priorities: costs and growth.

19 Walking the tightropeThe tax affairs of insurance companies are coming under scrutiny. What should they expect from the OECD and G20’s latest project?

22 Captives to 2020What the future holds for captive insurance companies.

27 Meeting the obligations of Solvency IIWhat the new disclosure requirements mean for insurers.

31 The skeleton keyData is a powerful resource for insurers. However, it is essential to see it as more than merely a problem-solving tool.

35 A world firstFlood Re is putting in place game-changing plans to provide affordable insurance for 500,000 UK homes at risk of flooding.

39 Contacts

Simon Burtwell UK Partner and Head of General Insurance

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August 2015 General Insurance 3


Insurance is a win–win industry: customers gain protection from events that neither they nor the insurer want to

happen. So the fact that insurers are trusted even less than banks was one of the shock findings from our 2014 Global Consumer Insurance Survey. We asked around 24,000 people (including almost 11,000 in EMEIA and 846 in the UK) about how they perceive insurers. Globally, 69% of respondents claimed to have complete or moderate trust in insurance companies — but just 53% in the UK did so. Only 42% of UK customers aged between 35 and 49 have complete or moderate trust.

Our UK survey findings are also striking because of the relatively high levels of switching intent they reveal. Focusing on non–life products (where more regular policy decisions occur), 36% of UK customers surveyed said they

were likely to switch in the next 12 months — compared with 26% globally. For both life and non–life products, policy costs and terms dominate UK customers’ reasons for switching. By contrast, costs and terms drive 50% of switching decisions for consumers globally, but policy benefits and coverage, recommendations, service levels

and insurer communications are also significant factors.

Such low levels of trust and high degrees of switching intent among UK customers may reflect the limited personal interaction they have with their insurers. Price comparison websites are widely

Let’s communicate

“For 75% of customers who

experienced a moment of truth,

the outcome was positive.”

used in the UK when policies are taken out and levels of interaction during a policy’s life are lower than elsewhere in Europe. Cultural factors, such as the UK’s challenging media, may also explain the divergence from global findings.

Our findings so far make troubling reading for the industry. However, we also discovered that many customers are willing to recommend their insurer: 66% of customers globally are likely or very likely to recommend their insurance provider to friends or relatives. In addition, when customers change insurance company, they don’t necessarily dislike their former provider’s company or service: 38% of customers willing to recommend their insurer have closed policies in the last 18 months. These findings are replicated in the UK: there is no correlation between the attrition rate and those likely to recommend or who are neutral on the matter.

Moments of truthInsurance companies have scope to improve their customer relationships and their retention rates. In fact, the opportunities are potentially greatest in the UK, where there is most scope for increasing current contact levels. Globally, 71% of customers took some action concerning their policy during the last 18 months (perhaps updating an address, asking for information or closing the policy). In the UK, just 41% had any such interaction and just 30% of UK customers have an ongoing policy.

Such interactions are important because they enable insurance companies to create ‘moments of truth’ — experiences that change their customers’ opinions. Among our survey participants, the majority of those who took action concerning their policy experienced such a moment of truth — their perceptions were changed. In the UK and globally, the minority of these moments of truth were related to claims. Far more concerned potential new policies and around half were related to existing policies. Particularly encouraging for insurers is the fact that, for 75% of UK customers who experienced a moment of truth, the outcome was a positive one: they had questions answered, problems resolved, they

renewed their policy, increased their coverage or purchased another product. This suggests that if insurers create more opportunities to interact with their customers, they may well change perceptions in positive ways that encourage additional policy sales, or at least more policy renewals.

Our research also shows that customers are open to more communication from their insurers. We asked survey participants how often they were contacted by their insurers and how often they would like to be contacted. Among UK life customers, we found a communication gap of around 10 percentage points in favour of more frequent contact than just one communication a year. Among UK non-life customers, this communication gap increases to 20 percentage points. Furthermore, 10% of UK life customers and 18% of non–life customers never receive a communication but would like to be contacted about promotions. Our findings are endorsed by recent market experience. When the regulator required insurers to check their customers’ contact details, the

customer response was positive. Insurers need to learn from that experience and take steps to ensure that future contact is even more beneficial.

As they like itThat includes establishing the best way of contacting customers, tailored to their personal preferences. Based on our findings, when UK customers contact their insurer, they are most likely to do so by phone. However, many UK customers (18%) currently being contacted through regular mail and by phone would generally prefer to be contacted by email.

Given that the shift to digital contact is only likely to increase, insurers need to take the opportunity to make such contact as powerful as possible. The ability to email web links to customers who phone in with queries — enabling them to see detailed policy information on screen — can add great value to those exchanges. The ability to address claims issues quickly through email and apps should also be maximised. In such ways, insurers have the potential to transform the customer’s experience and build stronger relationships. GI

Why do customers have so little trust in insurance companies? Today’s insurers face considerable relationship-building challenges.

By Graham Handy

53%of UK respondents trust their insurer

Graham Handy UK Partner and EMEIA Insurance Risk [email protected] Tel + 44 20 7951 8173


August 2015 General Insurance 76 General Insurance August 2015

General insurers in the UK face a continually increasing customer expectation, combined with significant cost and margin issues, including:• Price transparency, especially in a

market where aggregators dominate, with consequent low customer retention rates and margin pressure

• Service transparency, where poor service is instantly known across social networks — with social networks or friends being a key channel for product recommendation

• Fraud caused by the financial crisis • Low levels of trust — our 2014 Global Consumer

Insurance Survey highlights that trust in insurers is lower than in banks

• New competitors with simpler distribution models and established or deeper relationships with customers — for example, retailers, banks and utilities providers

• Low levels of innovation in products and services for customers, driven by high costs and complexity of existing systems and operations

• Poor product penetration, with typical holdings per customer not exceeding 1.2 products

• A lack of interaction, with providers often not interacting with customers other than at yearly renewal and hence not building relationships or loyalty with customers These issues mean that there is continual pressure on

margins. As a result, general insurers need to service customers more efficiently, look for new means of encouraging loyalty and brand ‘stickiness’, and provide new services for evolving customer needs.

If these challenges aren’t enough, there are two other significant issues facing insurers. Firstly, a huge legacy systems problem with associated significant cost overheads, causing expensive manual processes and preventing simple introduction of the new services needed to attract customers. Secondly, an ongoing move to digital channels by customers — with predictions that digital interactions with financial services organisations will outnumber face–to–face in some markets by 250:1 by 2016, and mobile interactions will outnumber calls by 30:1.

Traditional approaches are not enoughDigital communication will be a key channel for customers but, with a huge issue of inflexible legacy systems and manual processes, making a business case for digital can be tricky. If poorly implemented, it could end up as window dressing — a nice front end but poor fulfilment of the digital promise. Faced with all these issues, what are general insurers to do?

EY’s belief is that this combination of issues means that traditional approaches may not deliver the transformation that general insurers need to go through.

These approaches may include introducing a large programme to create digital channels, integration and

master data management to make links between systems and a ‘single customer view’, and package replacement of legacy systems.

However, doing all these things together is very expensive, has a massive impact on the organisation and leads to inevitable compromises between affordability and breadth of transformation — it will probably not deliver true transformation and is, at most, a large ‘sticking plaster’ across some of the problems before the money runs out.

Looking for a way forwardBut there may be another way, and we are working with a number of leading general insurers to deliver a far more cost–effective and benefits–led approach.

Key to our approach is recognising emerging themes coming from outside the industry, including:• Digital passports, and the ability to positively identify

customers (including Know Your Customer), creating a simple way of truly linking product holdings to customers, and a simple way for customers to share key information digitally with insurers and intermediaries. In a digital passport world, the

customer does most of the work of maintaining these product links and keeping personal details up-to-date, and provides far more customer insight than insurers are typically capable of gathering.

• Digital ‘software as a service’(SaaS) models, which deliver insurance-specific services across web and mobile channels, involving a simple setup and relatively small development projects or costs. Typically, these SaaS platforms include a digital vault for all policy documents and communications, self–service of policy changes, easy quote and buy, personalised offers with ‘one click’ purchase, video support or web chat to provider or intermediary, loyalty services and digital engagement — including personalised social networks and communities of interest, as well as educational videos and lots more. In fact, these SaaS platforms are far more capable than those used by the current general insurance digital leaders, operating at a fraction of the cost, delivering under a ‘pay per use’ model and working across all the products an insurer provides.

Overcoming new obstacles

By Chris Lamberton

General insurers face a range of challenges and need a transformative approach to meeting them. But traditional ways of achieving change may no longer be enough.

GET

TY

“This combination of issues means that traditional approaches may not deliver the transformation that general insurers need.”

• Software robotics, or ‘virtual workforce’ technology that allows fully automated processes across any type of legacy system. This technology is becoming widespread in banking, but is still new to insurance, and fundamentally allows software ‘robots’ to perform all the operations that typical back–office agents would perform. Fundamentally, if the process does not require expert judgement and is rule–based (such processes are often outsourced), software robotics can do the same as an agent, but more quickly, more accurately and for a fraction of the cost. Software robotics can also interact with digital channel SaaS very simply — if a customer does a ‘quote and buy’ on a mobile, the software robotics is told to perform end–to–end fulfilment (for example, set up a policy in an administration system, set up a bill in a finance system, and then send out policy documents through the digital channel).

Balancing old and newEY believes that the adoption of this combination of newer technologies avoids the common roadblocks of traditional transformation programmes:• The combination of digital passport and digital SaaS

and robotics can be deployed for far less money than traditional technology, and hence can be delivered quickly for one product or country, then rapidly rolled out across all other products, irrespective of the use of legacy platforms.

• The ‘pay per use’ nature of this combination means that insurers don’t have to spend millions on a system and hope for its adoption. They only pay when customers use digital services. And every time a customer uses the digital platform (such as for self–service), this saves significantly more cost than the service and hence pays for itself very quickly.

• The use of software robotics allows existing legacy platforms to be ‘wrapped’, so they still provide good fulfilment through digital channels, without the need

for expensive integration of package replacement. This allows any package replacement programme to be better targeted (for example, to allow new products and services), and at a pace the company can far better accommodate. In fact, some companies are using software robotics as part of the migration from legacy to new systems — for example, moving customer policies at the point of renewal.

• Creating a reusable platform for new customer–focused services, with little further investment. Hence, once deployed, these technologies can be rolled out across existing products, yet also form the basis for simple and cost–effective delivery of new products or customer services.

• Fundamentally, these technologies allow general insurers to create a true ‘trusted relationship’ with customers, either directly or via intermediaries, with this relationship allowing a win-win for customers and companies. Customers want better service and simpler ways of interacting, to be better understood, to be rewarded for loyalty and to have better control of their relationship. And the companies have lower costs, more engagement and efficient channels to customers — and happier customers, which boosts retention rates.Currently, general insurers are in significant ‘customer–

relationship deficit’ and ‘digital deficit’, but by putting customers at the heart of their operations, and through new innovation, insurers can truly become customer–focused and, ultimately, more profitable organisations. GI


“Adopting a combination of newer technologies avoids the common roadblocks of transformation programmes.”

Chris LambertonUK Partner, Performance [email protected] Tel + 44 20 7951 1963


The sale and distribution of general insurance add–on products is a key area of focus for the FCA, with 2015 being the year the regulator will set out its proposals for further transparency around

how these products are distributed and sold. The regulator’s ground–breaking use of behavioural economics has generated a lot of attention and controversy, and its approach has given rise to speculation about potential solutions and the impact these will have on business models. In this article, we examine the market study that led to the FCA’s concerns, and its proposed remedies.

An add–on is an insurance product that is sold to consumers alongside (i.e., as an “add–on” to) a primary product. Those can be financial services products, for example core insurance (e.g., motor insurance), or non-financial retail products, such as mobile phones or cars. The FCA estimated in its market study that if the proportion of add–on sales for the five products it investigated is on average representative of general insurance add–on markets more broadly, then the annual volume of add–on purchases by UK consumers could be around £1bn.

Extra, extra!A look beyond the hype surrounding general insurance add-ons to the regulatory trends at work in this industry sector.

By Steve Southall and Richard Read

GET

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The FCA’s concernsThe FCA carried out its review into general insurance add–on products in 2014. This was the first market study carried out by the regulator under a new approach that uses behavioural economics to understand the motivation behind customers buying general insurance add–ons, and why they choose to do so under certain circumstances. This led to a different set of findings and conclusions from those of a more traditional regulatory thematic review, assessing more directly the customer experience in buying insurance products. The key points the FCA raised were as follows:• Competition in the market for general

insurance add–on products is not effective

FCA is seeking to ensure that consumers understand the monetary value of the products they are buying and how this varies by firm, distribution channel and whether the product is sold as a standalone product or as an add–on. In our opinion, the publication of claims ratio data could lead to the following market reaction:• A short–term reduction in margins as

insurers seek to increase base prices on core products to offset the loss of add–on income

• A change in cover, or terms and conditions, for add–on products

• Over the medium term, a harmonisation of core and add–on claims ratios and, potentially, a reduction in commissions

• Potentially, a reduction in the rate of innovation of new add–on products, with the financial rewards for launching new add–on products reducing

• A shake–up in the market place, with those who have historically been more successful at driving add–on income either losing out or needing to find other methods to replace lost margin through reducing add–on sales

• A further decrease in the consumer to insurer relationships

What to consider nowFirms where general insurance add–ons are a key (or growing) part of the strategy should consider how they are placed to meet the challenge of demonstrating that these products deliver value for customers. Firms should consider the following aspects:• Do add–ons genuinely offer value for

money to customers, and if not, why are they being sold?

• How important are add–ons in terms of the profitability of the core product, and have the key conduct risks of selling these products been considered?

• What is the likely impact on margins for add–on and standalone products?

• What would the impact be of mandatory publication of claims ratios?

• Is sufficient information given to the customers on product terms and conditions, cancellation rights, and other key information?

• What level of monitoring is carried out on the sale of products by third–party distributors? GI


“The FCA is seeking to ensure

that customers understand the

value of the products they

are buying.” SummaryThe upcoming proposals from the FCA to address the concerns it identified in the market study have the potential to materially affect the sale of add-on (and some standalone) general insurance products. Firms should start considering now the implications of the regulator’s drive for greater transparency around how these products are sold, and the value they bring to customers.

Steve Southall Executive Director, Regulatory [email protected] Tel + 44 20 7951 1004

Richard Read Senior Manager, Retail [email protected] + 44 20 7951 8713

sold on a standalone basis. From this, it drew a broader conclusion: that its concerns about lack of consumer understanding and poor value for money also applied to standalone products. This gives an indication of the high level of regulatory scrutiny that can be expected on the sale of consumer general insurance products by the FCA in 2015–16.

The FCA’s proposed remedyThe FCA’s will consult on a proposed remedy in 2015. We do not yet know the exact details this will contain. We do know from the market study that in defining poor value, the FCA has used the claims ratio (the proportion of the premiums consumers pay that is paid out in claims) as its core measure of value, and this is likely to be retained.

The market study showed that claims ratios for add–ons are almost all substantially lower than for more mainstream general insurance products. In the case of add–on GAP and Personal Accident insurance products, the claims ratios were reported to be exceptionally low, indicating very poor value for money (10% and less than 9%, respectively).

The FCA also commented in the market study that “… poor value is not constrained to add-ons, and some standalone products represent poor value too.” On this basis, the publication of claims ratios, by product and split between add–on and standalone, would seem to be the minimum level at which data would be published. In shining a light on low–value products, the FCA would be hoping that pressure would increase to improve product value. Notably, the FCA has chosen not to shine a light on the level of commission on these products, which, many would argue, also significantly influences market behaviours and customer outcomes.

How will the market react?The market study estimated that, for the five add–on products under review, consumers overpaid by around £108m to £200m per annum. By publishing claims ratios, the

and, in the FCA’s view, these markets are broadly not working for consumers.

• Ineffective competition translates into consumers paying too much when buying the products as add–ons.

• The add–on mechanism is not well understood, with consumers focused on the purchase of the primary product and often not aware of the add-on they have bought.

• Consumers are getting poor value from add–on products and there is a lack of transparency and comparability about the value provided by these products.

• There is little pressure on firms to offer good value as add–on buyers are less likely to shop around and are less price–sensitive.

• There is often insufficient information available about the quality and prices of add–ons.

The severity and robustness of the FCA’s conclusions from this study highlight how seriously the regulator is viewing the sale of add–on products, and therefore the expectations that they will place on firms that design, distribute and sell add–ons to demonstrate that it is delivering a fair outcome for those customers.

The FCA specifically examined the add–on markets for Travel, Gadget, Guaranteed Asset Protection (GAP), Home Emergency and Personal Accident insurance, and these products remain in the regulator’s spotlight. Yet the FCA also compared the sale of these add-ons with how these five products were

“Concerns about lack of consumer understanding and poor value for money also applied to standalone products.”



Driven by the desire to reduce costs, and in line with other industries, many insurers in the UK and Europe created large–scale technology and operational service centres offshore. At the time, this

was a continuation of the trend towards centralising services within the UK, which started with insurance technology centres in the 1960s and moved into call centres in the 1980s and 90s.

More recently, the tide appears to have changed direction, as the press has reported examples of roles and activities being brought back onshore, commonly citing the reluctance of customers to accept overseas service. Despite the very public headlines, there is a renewed wave of focus on optimising the claims operating model across front and back office, through a combination of local hubs, nearshore centres and more ‘traditional’ offshore centres, to achieve similar objectives to the first wave of change. The difference now is that the maturity of technology and offshore capability management is far more advanced than was previously the case.

Trends driving renewed interest• Global economics and talent development:

The insurance industry has a history of creating both UK–based service centres and offshoring activity in India and the Philippines but, in recent years, the list of possible destination countries has grown far longer. It now includes China, Poland and Mexico, as the pools of talent grow and the search for cost efficiency takes companies to new geographical locations. However, the recent political upheaval in Eastern Europe should serve as a reminder that it is not all about unit labour cost and that political and economic risk should feature highly in any management decision–making process.

• Technology: Advances have shifted some previously perceived obstacles: for example, latest generation workflow has removed many of the issues with case or file sharing. The quality of data available from many newer claims applications is far better, and the channel shift in consumers has meant that offshore web chat has had

far greater acceptance than phone calls ever had.In principle, well–implemented shared

service centres, whether onshore or offshore, can lead to increased productivity and improved claims outcomes, and create a scalable organisation for future growth. There are, however, a number of issues in the implementation and ongoing running of a model that can erode benefit and these therefore need to be managed effectively.

Better claims outcomes at lower costWith fast-changing expectations from both personal and commercial customers regarding the way they want to have their claims handled, on top of increasing cost pressure, there are four areas that claims directors are wrestling with:1. Inefficient organisation structure: Often, a legacy of acquisitions or historical change has left some claims operations below critical mass, as they are spread over too many locations, with separate processes and separate management.

Bringing fragmented teams together can create economies of scale, improve spans of control and reduce cost. A critical mass of skills can also bring greater efficiency and effectiveness, and provide claims staff with a clearer and more structured path for career progression.2. Inconsistent practice: With separate teams under different management, customers can get a different experience or even different outcomes depending on their type of claim. This is a particular problem for intermediated business, where brokers often cite consistency as being key to good service.

Identifying and applying the same high standard of handling practice across all adjusters not only improves customer experience, it will shorten claims life cycles, reduce leakage and improve claims costs.3. Salary costs: With a number of UK insurers having significant presence in or close to London, this is an area that often comes under the microscope. At a minimum, organisations should be considering opportunities to create shared operations in lower–cost locations in the UK.

While there may, at first glance, be big savings to be gained from offshore locations,

Turning the tide on claims outsourcing

By Imran Ahmed and John Cooper

There is a new wave of focus within the industry on optimising the claims operating model by using a combination of onshore, nearshore and offshore centres. “In recent

years, the list of possible destination countries has grown

far longer.”


An assessment of the maturity of service centre experience for various global locations

USUK

Canada

Australia

Singapore

Philippines

India

Hungary

Poland

China

Mexico

Argentina

Romania

Costa Rica

Malaysia

Brazil

Mature Emerging

Expanding

Aspiring

Established

the salary inflation can be far higher than the UK (wage inflation in India is still in double digits, despite the recent downturn) and, in some cases, turnover can be significantly higher too. Managing operations effectively does require local expertise and experience and, as a result, over time, offshore clusters of expertise have emerged. This has led to a pool of management talent and experience to work with. 4. Inefficient claims assignment: With different practices and philosophies, and disparate staff, ensuring that claims are being dealt with by the right handler with the right skills can be difficult. Regardless of whether claims should be segmented by complexity, line of business, broker or location, any ineffective segmentation will lead to increased cost and poorer claims outcomes.

Centralising claim notification and assignment has proved to be one of the effective tools in addressing this issue and, in turn, can reduce leakage and improve customer service. This can often be delivered effectively across both onshore and offshore locations.

Can it really work for me?Even when claims leaders have identified that a centralised service centre, onshore or offshore, may bring some benefits, there are a wide range of questions that will need to be answered to convince their boards that the investment and upheaval is going to be worth it.

Common design questions• Where do I put it? Low–cost locations may

help with lowering staff cost, but will you be able to source the skills to improve claims outcomes and maintain service quality?

• How long will low–cost locations remain so and, if this is the only benefit driver, will you have to relocate again in three years’ time?

• What activity do I put where? For example, do I keep my high–complexity handlers in the same centre as low–complexity adjusters?

• Where I have class–specific expertise in multiple locations that can be hard to source in a single site, or a customer demand for local presence, can a virtual

For some claims functions, there are undoubtedly benefits from building a service centre that has consistent processes, best practice, efficient spans of control and is, if possible, located where salary costs are relatively low. This is not, however, a panacea for all problems.

The creation of a claims service centre should be considered where it is seen as a long-term, strategic approach to serving customers efficiently and effectively, consistent with the broader business strategy. It is less likely to succeed if it is viewed as an idea in isolation from the rest of the business: for example, a way just to reduce the cost of claims handling. This could mean that customer service and claims outcomes will become expensive victims of any solution.

It is a vision that’s easy to fall for — assuming that having all claims staff in a single claims environment will drive consistent processes, enable common technology use and bring a single management structure — with the belief that doing all this will inevitably solve all your performance issues or drive future performance ambitions. But beware — claims managers must be sure that these changes will address the underlying causes of performance problems or support future strategy.

The worst position is reserved for those who find the only thing they have to show for their multimillion–pound investment is all the same problems as before, but many miles away from them! GI

service centre provide a workable solution?• How do I build a model that supports the

customer proposition across all product and claim segments — particularly in the higher–value or specialist market?

Key migration questions• Do I move all the work at once or in phases?• How do we ensure service levels are

maintained, as staff morale may be affected during the transition?

• Realising the full benefit doesn’t start until the centre is running, so how do I maintain a disciplined approach to performance management throughout the programme and after migration?

Maintenance• How do we maintain the development and

sharing of good practice and ensure it continues to be applied?

• Can practice and processes be shared across different classes of claim or line of business?

Be clear what you are trying to achieveThe number of questions and the apparently contradictory nature of some of the issues and solutions mean that having a structured process to work through is critical. Typically, time spent reaching consensus among stakeholders on key questions will be well spent and will help define what success looks like, particularly if some have had painful experiences from previous initiatives.

A good place to start is to be clear what business strategy and benefit levers are guiding your design. For example:1. Agree with the board the long-term priorities for claims and claims service to support the customer proposition 2. Identify not only the key metrics that will drive your future success, but also where today’s performance stands against them3. Be clear on what the root causes and drivers are of any performance issues or benefits you are trying to deliver4. Agree with all stakeholders on a set of principles that will govern your decisions or design for future claims operation5. Consider, in a structured way, a range of options for claims service centres, taking into account what you are looking to achieve in the long term6. Prepare a detailed implementation and change management plan

If you don’t know what the problem is, you can’t know that claims shared services is the answer.

14 General Insurance August 2015 August 2015 General Insurance 15

“There may be big savings to be

gained, but salary inflation can be far higher than

in the UK.”

Total cost per person for professional staff, excluding bonus(benchmark used is qualified accountant)

£70,000

Central and Eastern Europe region salary range includes Hungary, Slovakia, Poland, Romania, Bulgaria, Lithuania, Latvia and Estonia

£60,000

£50,000

£40,000

£30,000

£20,000

£10,000

£0Onshore Nearshore Farshore

London

Reading

ManchesterIrelandScotland

Russia26% saving

60% savingSouth AfricaCzech Republic

Ukraine

Singapore

ChinaMalaysia

India

Imran Ahmed UK Partner, Performance [email protected] Tel + 44 20 7951 1882

John CooperSenior Manager, Performance [email protected] Tel + 44 113 298 2471

Central and Eastern Europe


According to our 2014 Global Insurance CFO Survey, and after some tough years in the

insurance sector, global insurance finance leaders are looking both to support business growth and reduce costs. With the onset of Solvency II, finance leaders also have a clear eye on the pace of regulatory change, and this is influencing CFOs’ visions for finance through to 2020.

CFOs ranked their top key business drivers as:• Relieving pressure on costs

and margin (64%)• Achieving growth, expanding

into markets or expanding through M&A activity (59%)

• Improving capital and liquidity position (41%)

• Addressing competition from globalisation and new market entrants (41%)

• Responding to regulatory change (35%)In response to these main

business drivers, CFOs are focusing on prioritising actions to meet the increasing demands on finance and actuarial teams through to 2020. Our survey demonstrates that the top priorities for CFOs reflect the need to add value to the business through performance management and improved decision support.

The top priority of “being a better business partner” (81%

ranked this in their top three) reflects the need for finance to have a closer relationship with the insurance business. Through this, finance will be able to develop a deeper understanding of the management information that the business requires to make key operational decisions.

Finance leaders’ second priority of improving the quality of internal and external reporting (62%) demonstrates the desire to produce consistent data on multiple reporting bases in ever more granular detail. With the onset of increasing regulation, there will be far less tolerance of errors or surprises in reported results. The challenge here for non–life insurers is the legacy multiple–source systems resulting from a history of growth through acquisitions and a lack of investment in finance systems over the last 10 years or more.

The third priority for CFOs is implementing new regulatory and reporting requirements (43%), particularly for EMEIA general insurers with Solvency II approaching, where the need to strike a balance between delivering value to the business and meeting daily operational demands will continue to be challenging.

As a result of these priorities, non–life insurance CFOs have been increasing their efforts to improve the capabilities of their finance and actuarial teams. In the survey,

By David Foster and Ian Robinson

Finance leaders must weigh up their two top priorities: costs and growth.

Striking a balance


frequent theme when talking to finance and actuarial executives in the non-life insurance sector, with technology issues (57%) close behind. Considerable movement has already occurred in this area towards greater centralisation of systems and processing through shared service centres and outsourcing. While there is potential for further centralisation, interestingly, there is an increasing preference for onshore, as opposed to offshore, shared services. This may be the result of decreasing wage differentials between the highly developed Western economies and other rapidly developing economies. It also reflects other organisational and cultural factors.

Finance leaders also identify a significant people challenge (51%) in relation to accessing the resources and skills they need. In addition to strong analytical skills, effective business partners must understand the business and the relative return on capital

71% of global non–life CFOs stated that they had started a change programme, while a further 24% said that planning for a change programme was under way.

Levers for change The role of finance and actuarial functions has become ever more critical as insurance companies around the globe continue to invest in data management and analytics capabilities. As a prime source of management information, the processes and systems supporting these functions are key to developing deep insights into business performance and customer behaviours. The main challenges to developing such insight can be seen in the chart below.

Weakness in the quality and granularity of data (83% ranked this in their top three) is a

across different business lines. This may reflect their growing interest in working in the wider organisation and it highlights the heightened war for talent across all business functions.

Finance vision 2020 Looking forward to 2020, finance will require cultural change and numerous specific people and organisational initiatives, mainly linked to the development of the business partner role. Global non–life CFOs can lead their finance function by focusing on three key activities:1. Fix the current reporting process through the development of an efficient reporting solution architecture2. Enhance the added value to the business by driving real commercial awareness through timely and relevant management information and by linking strategic objectives to performance indicators3. Improve finance and actuarial operational performance by working “smarter not harder”, with processes

Challenges and priorities

Being a better business partner (understanding the business, improved decision support)

Data — quality granularity not synchronised with needs

First

First

Second

Second

Third

Third

Improving quality of reporting (internal and external)

Technology — infrastructure not fit for purpose

Implementing new regulatory and financial reporting requirements (includes accounting pronouncements)

People — lack of resources or quality (skills) of resources

20%

20%

31%

13%

25%

19%

6%

25%

6%

13%

6%

43%

19% 19%

25%

38%

44%

25%

16 global non–life insurance CFOs were asked to rank in order the following finance and actuarial priorities facing their organisation through to 2020.

The same 16 CFOs were asked to rank the main challenges finance and actuarial will need to address in becoming better business partners to fully participate in the execution of the business strategy.

“The role of finance and actuarial functions has become ever more critical.”

David Foster UK Partner, Financial & Accounting [email protected] Tel + 44 20 7951 5687

Ian RobinsonSenior Manager, Performance [email protected] Tel + 44 20 7951 6106

“right skilled” to strike the optimal balance between effectiveness and efficiency

Through these activities, finance will leverage its enhanced reporting capabilities to drive real commercial benefit, all at a lower cost than today. Non–life finance teams will thus be able to address the cost management, regulatory and reporting challenges that the industry faces through to 2020. GI


Rarely a day passes when the tax affairs of multinational groups are not discussed in the press. Insurance groups, along with all multinational businesses, are facing a time of unprecedented

change in the tax landscape. Boards increasingly need to consider the potential reputational impact should the group’s tax affairs hit the headlines.

The Organisation for Economic Co-operation and Development (OECD) is now halfway through its Base Erosion and Profit Shifting (BEPS) project, assigned by the G20 to address perceived tax avoidance by multinational corporations. The project is moving at a rapid pace and the global tax changes proposed are likely to impact commercial, financial and operational aspects of insurers’ businesses. Tax is therefore no longer just an issue for the group tax function; these changes will impact finance, operations and risk departments. Insurers need to assess, remediate and plan for these proposals.

Who is at risk?Insurance groups with any of the following will need to assess the impact of these changes:• Overseas affiliates, some in low–tax

locations• Globally mobile workforce• Centres of excellence, shared service hubs,

digital platforms• Cross-border intra–group arrangements,

especially intra–group reinsurance, fronting, investment management, financing

arrangements and service charges• Emerging market expansion plans

Why?The BEPS project is looking to radically reform the international corporate tax framework. Its core principles are based on three pillars of ‘coherence, substance and transparency’, comprising 15 specific Actions to be addressed over 2014 and 2015 by working groups. Working groups are formed of OECD Secretariat and Member State government representatives. Working groups prepare and release Discussion Drafts, upon which the public are invited to comment through written representation and in forums. It is intended that the project will conclude at the end of 2015, and Member States will subsequently legislate the proposed measures.

What are the potential impacts?The Actions are broad and cover a wide remit of international tax matters, ranging from changes to determining tax basis, to anti-avoidance provisions, to global reporting requirements. Each of the Actions has the potential to affect the insurance industry.

For example, there is now a requirement for multinational groups to file ‘country–by–country’ reporting templates disclosing revenues, headcounts and taxes paid for each country in which the group has a taxable presence. Guidance as to reporting Generally Accepted Accounting Practice (GAAP) and definitions of key fields are vague and may be left open to interpretation

By Jenny Coletta

The tax affairs of insurance companies, alongside other multinationals, are coming under scrutiny. What should they expect from the OECD and G20’s latest project?

Walking the tightrope

“Insurance groups are facing

unprecedented change in the

tax landscape.”


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by Member States. Implementation timelines will also vary by Member State but could be as early as 1 January 2016, which is extremely tight given that compliance may require systems changes and new reporting consolidations. While the template is not proposed to be made publicly available, many insurers are concerned that such disclosure could be required in future. It is also easy to envisage that, in the current environment of media scrutiny, the template could be requested by investors, the media or public bodies. We recommend that groups carry out dry runs now in order to determine data and reporting requirements in time to comply.

Some of the actions are looking to target the deductibility of interest payments and hybrid instruments. These actions are currently being discussed in public

consultation, but include proposals to limit the tax deductibility of debt if certain group-wide thresholds are exceeded or where certain hybrid instruments or arrangements are in place. Proposals are currently in a very early stage, but insurers will need to monitor the position in order to consider the impact on cost of capital.

Significant changes have been proposed, which are likely to lower the threshold for creating a taxable presence. This could include digital platforms, data warehouses or servers. Additionally, previous exemptions for staff performing certain preparatory or auxiliary activities may now trigger a taxable presence. Insurers should assess the potential additional cost of these proposals in view of operating models and digital strategies. Groups operating through Freedom of Services or representative office arrangements should also consider the potential impacts of these proposals.

Managing riskActions are also targeting the transfer of risk and economic substance of arrangements, with provisions potentially looking to recharacterise certain transactions. The insurance industry is particularly concerned about these proposals in respect of intra–group reinsurance arrangements and the extent to which tax deductibility could

There are three questions that insurance companies should ask themselves. First, what is your international tax profile? It is likely that only those groups with no international affiliates would be considered low risk. Otherwise, there is a wide risk spectrum that insurers will need to assess.

Second, insurers should take the opportunity to lobby the OECD and Member States. EY has formed a coalition of insurance groups and is actively engaged in lobbying the OECD and governments on these proposals. It is vital that insurers shape the debate or they risk becoming collateral damage.

Third, insurers should assess their potential risk exposure with a view to remediation which may require financial, operational or behavioural change.

Assessing the impactThe impact of these tax reforms could have wide-reaching effects for insurers. Not only could they result in additional tax or operational costs, but also in reputational damage. Insurers should be assessing how these proposals may affect them. There may be a need to overhaul or modify financial reporting systems in order to meet compliance requirements, or to reassess or restructure operating models to mitigate tax costs or increasing pricing. GI

be affected. Groups with intra–group reinsurance arrangements should assess these and measure the impact on cost of capital and front–end pricing.

Some governments have already begun responding to the BEPS project by introducing new legislation, such as the UK’s announcement of the Diverted Profits Tax (DPT) regime. The legislation was included in the pre-election Finance Bill 2015 and became effective from 1 April 2015. The DPT imposes a tax charge of 25% on profits deemed to be diverted from the UK. Responses to this have been mixed.

Pascal Saint-Amans, Director of Tax Policy at the OECD, commented: “It’s a bit bizarre that in the middle of the project, you have a country acting unilaterally, because that’s what we are trying to avoid. But on the other hand, it shows that there is a really big political issue which is not about politicians speaking, but politicians taking action.”

For insurers, the key transactions at risk from this legislation are intra–group reinsurance arrangements, business models operating under Freedom of Services or selling offshore products into the UK, royalty payments, and even offshore shared service centres. The introduction of this new tax could have far–reaching commercial implications.

This is a punitive tax, with a higher rate than the current corporation tax rate. The DPT is not considered to be a corporation tax and does not fall within the usual self–assessment regime. Instead, groups will need to notify subject to very widely drafted notification provisions. This potentially means that a large number of groups will have to notify HMRC of a transaction, even if the DPT liability is subsequently reduced to nil. The notification period is short, with taxpayers being required to notify HMRC within three months of the end of an accounting period.

Next steps Insurers should analyse and assess their position now in respect of 2015 transactions.


“We recommend groups carry out

dry runs to determine data

and reporting requirements.”

Jenny Coletta UK Partner, International Tax [email protected] Tel + 44 20 7951 5993

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Captive insurance companies were very much a product of the volatile insurance markets of the 1970s and 1980s, and were originally set up by companies looking for a cost-saving method of addressing

their rising primary insurance costs. Setting up one’s own insurance captive as a subsidiary was seen as a cost–effective alternative to obtaining insurance from external providers and one that could bring with it bespoke coverage, claims settlement certainty and, potentially, tax advantages. Often they were sited in relatively exotic island locations, which made regular board meetings not entirely unpleasant.

However, over the past decade, the role of captives has changed dramatically and they are now more generally viewed as dynamic vehicles to facilitate risk financing, rather than just risk transfer or self-insurance tools. Estimates vary, but there are currently somewhere between 6,500 and 8,000 captives globally. They are now increasingly being used to address risks for which companies would find it difficult to obtain cover from traditional forms of insurance and as bridging

Captives to 2020: opportunities and challenges

By Jeff Soar

Captive insurance companies are no longer seen as mere risk transfer tools. What does the future hold for these vehicles?

“There are currently between 6,500 and 8,000 captives globally.”


environments between operating companies and sources of alternative risk capital.

For 2013, the total premium written by captives was US$123bn, with assets under management standing at US$485bn. What is surprising is that, since 2010, captive premium volumes have been growing year on year, counter–cyclically to the rest of the market (where rates continue to soften). Our discussions with captive owners, managers and reinsurers all suggest that this growth is due to steadily increasing retention positions on behalf of captive owners, rather than any actual rate increases.

1. Greater complexity in managing global programmesThe days when it was possible to issue global policies for multinational corporations are long behind us. Modern global programmes are all about the logistics, as both mature and emerging jurisdictions flex their muscles to enforce local placement for local risks and the ensuing job creation at home. Multinational companies are left to organise the patchwork of arrangements that enables them to put global coverage in place.

This used to be just a matter of finding an appropriate set of fronting companies (or

a global carrier with a network) that could get the paper you needed in the jurisdictions where you needed it, which could then be backed into the captive. But this has been made much more complex by an ever–increasing regulatory and compliance burden, which often dictates compulsory cessions to local (or state–backed) reinsurers against hefty withholding tax penalties.

In this environment, not surprisingly, fronting companies and global carriers are increasing their fees on a regular basis, both because they can and because their costs of collateral are on the rise.

Captive owners are therefore looking for alternative structures that give the licensing coverage they need without the involvement of a wide network of fronters. One popular suggestion is for captives to establish entities within Lloyd’s of London that enable them to take advantage of Lloyd’s global licensing structure in more than 100 countries.

2. Increased retention and diversificationCaptives have traditionally been used as retention and cession vehicles for their parents’ P&C programmes, where the captive retained a portion of the primary layer

Overarching themesSo what opportunities and challenges lie ahead for insurance captives in the years to 2020? There appear to be six key themes:

Greater complexity inmanaging global programmes

Increased retention and diversification

Rising interest in specialty classes

Increasing regulatory and compliance burden

Greater sophistication in the investment mix

Shift to strategic use of captives

Global programmes are becoming increasingly complex to administer and manage.

Captives are focusing on achieving increased retention and diversifying their risk portfolios.

Emerging regulations and tax regimes are playing an influential role in the choice of captive domicile.

Captive owners are focusing on improving their investment mix to maximise returns.

Captives are increasingly connected to the active management of their parents’ operational risks —

including trade credit, reputational and corporate crisis exposures and cyber threat.

While the vast volume of captive premium accrues to traditional P&C lines, there is increased interest in a range of

new business classes for captives.


Rising interest in specialty classes

General public TPL

Property all risk

Workers’ compensation (WC)/Employers’ liability (EL)

Casualty auto liability

Professional liability

Other financial lines

Product liability

Excess liability

Medical malpractice

US TRIA/MBC

Property marine

Environmental liability

Errors and omissions

Directors and officers (D&O)

Aviation

Umbrella liability

Fidelity

Fiduciary

Marine liability

Crime

Trade credit

Medical stop–loss

Surety

Credit life

Cyber liability

Extended warranty

GAP insurance

High excess coverages — over US$100m

Intellectual property

Political risk

US EB group term life (GTL)

Independent contractor/vendor

Property supply chain/ contingent BI

US EB — long–term disability

Voluntary critical illness

Voluntary home auto umbrella

Property terrorism non–US TRIA

0% 5%

10%

15%

20%

25%

30%

35%

40%

Captive preference to assume risk by type in 2013 and 2014 — for both traditional and specialty lines. Sample size — 20% of global captives

20132014

Traditional lines

Specialty lines

risk exposure … so self–insurance is the only certain protection.”

Although captive preference to underwrite cyber risks in 2013 looked encouraging, there is still reluctance to insure these risks on a standalone basis.

Reputational risk could have a severe impact on the balance sheet in the event of manifestation, but is yet to find its space in the insurance landscape. There is increasing sensitivity towards this risk and its potential implications, and markets are working towards developing a more effective product to cater to the needs of captives and corporates.

4. Increasing regulatory and compliance burdenRegulations have significant influence in determining the attractiveness of domiciles for the setup of captives. The Malta Financial Services Authority has been perceived to be very attractive, as captive dividends in this domicile are exempt from tax; the corporate tax rate for a Malta company is 35%, but shareholders are entitled to a tax credit of 6/7ths of the tax paid. This means that the net tax paid is 5%.

On the other hand, regulators in a few other domiciles are more stringent, forcing captives either to achieve compliance standards or move their books into alternative domiciles. Meanwhile, the US is seen as a mature market and, with increased sophistication of data and brokers, it still shows the potential for growth.

The global tax environment for captives is in a state of flux at the moment. Many countries are actively pursuing captive owners to back the captive insurers and reinsurers in their territories, often using tax to attract groups to their shares. At the same time, we see the Organisation for Economic Co–operation and Development (OECD) focusing on captives as part of its Base Erosion and Profit Sharing working group, which seeks to limit base erosion for tax purposes in multinational groups.

Where countries try to limit the area of captives through tax regimes, they tend to focus on a few key areas. Withholding taxes are often imposed on payments to countries deemed to be low–tax regimes, and these taxes apply to insurance premiums. For example, Belgium has imposed a 75% withholding tax on any payment made to Bermuda.

Other countries seek to limit the deduction

of premium payment for tax purposes if it is deemed not to be a commercial transaction; the US imposes such a rule.

Many countries impose a loan tax on offshore profits through controlled foreign company rules (CFC), which tends to optimise captives.

The UK has just changed its CFC rules, which give some relief to captive owners, but the UK is bucking the trend in this respect. Virtually every country imposes transfer pricing requirements on payments to captives which require proof that the premium payment made would be at least the same level as that paid to an unconnected party.

The OECD paper picks up a number of these mechanisms and seeks to strengthen them when dealing with any multinational tax planning, and captive insurance will not escape their attention.

In spite of all of this, the captive owners continue to push ahead with captives within their group structures. The tax benefits are important to them, but one recent experience shows that captives’ ownership will continue whether the tax benefits remain or not.

5. Greater sophistication in the investment mixCaptives are constantly reviewing their investment portfolio mix to match their liabilities, maximise returns and diversify their risk exposure. An illustration of the shift in investment preferences of financial institution captives from 2013 to 2014 is shown in the figure opposite.

This shows that the investments in cash and fixed income assets had reduced over the year, with a significant increase in the share of investments in alternative investments and hedge funds. This movement is primarily driven by a search for higher returns than those that are offered within the fixed–income markets.

The split of investments also shows that intercompany loans and other intercompany

“Social media sites such as Twitter massively contribute to reputational risk.”

(over and above a base layer of retention in operating companies) and any exposure above this was transferred into the insurance and reinsurance market in the form of excess layers. The captive might also participate further up the chain in some capacity.

However, we have seen evidence of a recent trend for increased innovation in captive insurance programmes, using structured or finite layers to give a funding mechanism for exposures beyond the captive, while allowing a higher attachment point for the risk transfer.

One global insurer whom we interviewed revealed: “We have been helping clients create a structured layer (basically a self–funded or finite layer) that sits in excess of the captive retention and helps to move the transfer layer to an attachment point which is feasible and commercially viable. This new four–layer model is starting to replace the traditional three layers.”

In terms of diversification, the majority of captives are still restricting their activities to managing the exposures of their parents. However, some captives are now seeking to diversify their books by increasingly exploring new avenues of coverage and financing, such as insuring third–party risks, loan book financing and pension deficit funding.

3. Rising interest in specialty classesIn terms of business written through captives, not surprisingly, mainstream property and casualty continue to dominate; however, captives are now starting to focus on new and emerging risks, for which it is difficult to find primary coverage from carriers. The spend so far has been relatively small, but levels of interest in cyber–crime liabilities and reputational or corporate crisis exposures are very high. The complex nature of both wordings and losses is the major current impediment. Some success has been gained in structured programmes, which do not get included in the figure (left).

As one leading global insurance broker commented: “What’s challenging with all these non–traditional risks is that it is extremely difficult to ascertain the quantum of financial loss and there is no simple method to calculate this. For example, social media and networking sites such as Twitter massively contribute to reputational risk, which can result in huge losses, but there is no way to calculate the


investments form a large share of the total asset mix (24% in 2014). This ability to back the liabilities with intercompany assets is a key area of flexibility used by many organisations in their captive funding.

6. Shift to strategic use of captivesCaptives are increasingly connected to the active management of their parents’ operational risks — including trade credit, reputational and corporate crisis exposures, and cyber threat.

Trade credit, supply chain and contingent business interruption (CBI) covers are the emerging areas of insurable risk that captives have started including in their programmes.

Since the global financial crisis of 2007–08, demand for trade credit insurance has been rising steadily. As the European sovereign debt crisis has unfolded, insurers report an uptick in notifications of overdue accounts in Europe, a potential precursor to claims. In the years since the peak of the financial crisis in 2008, global credit risk has persisted.

The globalisation of manufacturing businesses has been one of the dominant trends of the past two decades, as a broad mixture of third and first parties combine their capabilities to manufacture, package and supply consumer goods. The challenge for insurers has been how they assess the exposures inherent in such virtual supply chains, especially when the hazards may be exacerbated by single–source supply and just-in-time manufacturing techniques.

In both instances, captives are becoming far more prominent vehicles for the management of their parents’ operational risks and taking an important part in handling the exposures inherent in new business strategies. This was the original intent of captives and it is good to see that they are still able to be at the forefront of exposure management.

Opportunities and challengesMultinationals continue to find new, more strategic uses for their captives; a broader range of captive domiciles come to the fore and the industrial giants of the major growth economies are starting to use captives to manage their complex global exposures. We have also seen an interesting return to structured or finite layers as buffer zones between captive retention and cession — which looks set to increase.

A very interesting trend has been the increase in premiums within captives over the past four years, as the primary and reinsurance markets soften. This must be the first time that we have seen retentions increase when reinsurance rates decline, but it speaks volumes to the challenging insurability of many modern large commercial exposures.

Against this positive outlook, we have to set the ever–increasing demands of regulatory and tax compliance, and the protectionist behaviours of a growing number of governments, which continue to make captives and their global programmes logistically complex. However, overall, it seems safe to say that captives are here to stay and retention is the new norm. GI

42%

26%

10%

1%

21%

2013

32%

21%

9%

4%

24%

2014

Cash and cash equivalents

Fixed income, bonds and debt securities

Equities and shares

Alternative investments and hedge funds

Intercompany loans and other intercompany investments

Shifting investment preferencesThis shows investments in cash and fixed–income assets had reduced over the year, with a significant increase in the share of investments in alternative investments and hedge funds

Jeff SoarUK Partner, Transaction [email protected] Tel + 44 20 7951 6421


With the commencement date of Solvency II now less than 12 months away, and the first reporting to national regulators under the preparatory measures due in the middle of 2015 for those in scope, insurance finance teams are focusing

attention on future regulatory reporting. Pillar 3 of Solvency II will introduce significant new public and private disclosures — both quarterly and annually — and require these to be delivered within very short time frames. Reporting obligations will apply to all regulated insurance entities and groups in the European Union (EU), with

Meeting the obligations of Solvency II

By Kevin Griffith

What do the disclosure requirements contained in the new regulations mean for insurers?

separate reporting packages for standalone insurance entities and for the groups of which they are a part.

Requirements Pillar 3 reporting requirements consist of both narrative and quantitative information — some reported publicly and some submitted privately to national regulators, such as the UK Prudential Regulation Authority (PRA) or the Central Bank of Ireland (CBI). Quantitative reporting will need to be submitted in a prescribed format using the XBRL reporting language. In addition to requirements set at EU level, additional national specific templates (NSTs) will be required by local regulators. Both the PRA and the


“For the first time, analysts will have information in a consistent format and on a common basis.”

“Insurers are working frantically towards submitting company information.”

CBI recently issued proposed NSTs, which will apply in the UK and Ireland respectively, and will be required for the first time in 2017, based on the 2016 financial year. In early December, the European Insurance and Occupational Pensions Authority (EIOPA) issued updated proposals on the reporting requirements that will apply to all insurers and groups in the EU. Included in this package are templates to be submitted to regulators in May 2016 containing the opening Solvency II balance sheet and capital position, and a reconciliation with the equivalent amounts under Solvency I. Reporting under Pillar 3 will include:• A Solvency II balance sheet alongside an accounting

balance sheet • Details of minimum and solvency capital

requirement calculations • Detailed information about all investments held • An analysis of technical provisions and

reinsurance arrangements • Information about exposure to, and processes

for managing, risk Quarterly information is to be submitted to the

regulators within 5 weeks of the quarter following

approval by senior management, with annual information required within 14 weeks of the year–end. In the early years of implementation, a longer submission period will be permitted, starting at 8 weeks and 20 weeks respectively and gradually reducing thereafter. While the first official reporting will commence in 2016, national regulators require a subset of information to be submitted to them by some insurers in the period leading up to implementation, as part of the preparatory measures. These call for information on 2014 year–end data and Q3 2015 to be submitted during 2015.

Insurers are working frantically towards submitting group and individual company information to regulators just a few months after the financial reporting season. To add to the challenge, the PRA has recently written to a number of large firms, as well as those seeking approval for an internal model, informing them of the need to obtain reasonable assurance from an independent party on their Solvency II balance sheet as at 31 December 2014 and other selected information as submitted in the preparatory phase reporting templates in mid–2015. These firms are therefore required to accelerate preparations to obtain sign-off on methodology

and controls over the completeness and accuracy of information. We anticipate significant activity, such as dry runs of completion of the reporting templates, finalisation of policies and methodology, and an increased focus on implementing and testing automated reporting systems.

Major challenges in implementation • The main challenge is the need to produce, approve and

sign off a significant amount of data in a very short time period. This usually requires significant acceleration of reporting processes, involving close analysis of the levers that can be pulled to save time, the sequencing of year-end reporting tasks and coordination between different parts of the business. Getting buy–in from departments outside finance to make the necessary investment of time and resources to achieve this acceleration should not be underestimated.

• In 2017, all insurers and European insurance groups will publicly disclose their 31 December 2016 Solvency II balance sheets, their capital requirements and available capital, as well as an analysis by major country and line of business of technical provisions and premiums. In addition, they will provide narrative reporting on their financial performance, capital and risk management policies and exposures, and on the valuation of assets and liabilities under Solvency II and financial reporting. For the first time, analysts and others will have information in a consistent format and on a common basis for all insurers within the EU. This will require management to be prepared for the questions that may be asked about this information, and to be sure that the disclosures provided tell a story about the organisation that they understand and that is consistent with other information in the public domain.

• Insurers are making decisions about reporting processes and systems to be adopted during 2015, 2016 and beyond. Often, this will require intermediate steps in moving from a very manual, tactical reporting process and solution to a strategic, automated solution to meet the accelerated reporting timelines in a controlled and efficient manner. How best to do this will be different for each insurer, as they will have to take into account existing systems, existing projects to introduce new financial reporting processes


“Some insurance groups made initial bad decisions and wasted time and money starting again.”

Kevin GriffithUK Partner, Financial & Accounting [email protected] Tel + 44 20 7951 0905

and systems, and the ability to make progress on significantly changing existing routines in finance, actuarial, investment accounting, risk and IT.

• Obtaining the significant detail required on investments, their classification and detailed look through of investment funds remains a largely uncompleted task. While conversations have generally been conducted with major asset managers, there is still progress to be made on securing the functionality to store and report all required information in a timely manner. In addition, making sure that there is complete information covering the entire investment balance on the balance sheet is another task that should not be underestimated.

• Resourcing challenges abound as the demand for Solvency II finance specialists, with sufficient knowledge of the organisation’s systems and processes, increases dramatically. It is likely that insurers will have to think creatively about ways to manage the resourcing demand through retention, backfilling of knowledgeable individuals, and the effective use of additional external and internal resources.

What should insurers do now?• If not already under way, they should undertake a

dry–run exercise as soon as possible, by completing all templates and narrative disclosures that will be required — both for preparatory measures and full Solvency II reporting. This is the only way to be sure that all gaps

have been identified and that plans have been put in place to remediate.

• They should ensure that there is clear and formally agreed ownership from other functions for delivery of information of the required quality and in the required timelines, as reporting will be a significant scheduling and consolidation exercise, and will fail without the cooperation of actuarial, risk and investment accounting teams.

• They should finalise decisions on how reporting will be delivered. Will a software package be purchased? How integrated will the solution be with other reporting systems?

• They should consider seeking help to interpret requirements, challenge plans and road maps, and review key technical and design decisions. For reporting system spend in particular, it is important to make the right decisions, as there are many software vendors, and a bewildering range of solutions. Some insurance groups made initial bad decisions and wasted significant time and money revising decisions and starting again.

• They should think about the best way to involve auditors in the review process. While regulators are yet to finalise the extent of external audit requirements under full Solvency II measures, the PRA has given a strong indication with its 2014 year–end audit requirement that information will need to be audited in future. Early discussions with auditors to agree timing, approaches and design of controls are likely to avoid pain later. GI


By Sherdin Omar

Data is a powerful resource for insurers. However, it is essential to see it as more than merely a problem–solving tool.

The skeleton key

Insurers are gradually becoming more technology savvy, and big data is increasingly seen as essential for gaining important market and customer insights. The spectrum of take–up across the industry, however, is varied across lines of businesses. Within personal lines,

notably private motor, big data and analytics are well embedded; by contrast, speciality insurance is at a nascent stage in the use of data and associated analytics.

Regardless of the line of business, more needs to be done to demonstrate the true value of big data for insurers. Many currently see it as a solution to problems, rather than as being instrumental to the development of new insurance products that better align to customers’ ever–changing needs.

For example, with the emergence of telematics, the common approach has been to use big data to solve the motor insurance problem of improving profitability by risk selection and pricing. However, the real challenge is for insurers to use the data across the whole business, including in the development of new products, with a view to competing on product, price and service rather than just price.

Steps for success in analytics Data used correctly allows businesses to blend analytics and experience to help improve business processes and develop new or existing business opportunities. The critical point is to blend analytics and experience.

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Without that focus, there is the risk of finding meaningless results, or results that cannot be operationalised.

Essentially, the analyst and the business stakeholders should be able to explain what the business problem is, and each stakeholder should be able to expand on how their discipline is approaching the problem.

Be agileAs previously stated, not all analytical projects yield positive results, so making sure you have active engagement from all business stakeholders helps to minimise projects that yield poor results.

Agile, a methodology used in software development, could be applied to analytical projects. An Agile approach breaks down the project into manageable tasks and forms small, multidisciplined teams to deliver these tasks. This approach supports the core benefit of an analytical project, which is knowledge sharing and team building. It also allows for more hands–on training and enables consultants to work alongside in–house experts to achieve common goals and to embed analytics into an organisation.

A secondary, and no less important, benefit of deploying an Agile approach to an analytical project is that it lends itself naturally to


“Not all analytical projects yield positive results.”

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It is typical for organisations with a hierarchical structure to initiate a big data and analytics project by initially employing data experts to capture, assess and structure data into a pre–defined, usable format, working alongside IT experts to set up the technology platforms needed to host, manipulate and analyse the data. Following this, the statisticians (or data scientists) can explore the data to find interesting trends and correlations within it. However, to drive efficient results, it is critical to set the goal first.

Business–driven analyticsDifferent board members tend to have different objectives. These goals may be simple, clear and measurable (although rarely directly measurable); however, they are not always directly applicable to an analytics project. For example, the drivers leading to improved profits could be better risk selection, optimisation of pricing and product strategies, cost reductions or better claim management, all of which will have their own problems and a collection of different analytical paths to explore.

There are several key considerations when thinking through an analytical project: 1. Organisational goals2. Operationalisation of analytical solutions3. Likelihood of success4. Complexity of analysis5. Availability of data

All of these areas require input from different areas of the business.

Like most business problems, analytics should form part of an iterative journey, which will be a collaborative approach

between the analysts and business owners. The business stakeholders will need to set the agenda and goals, while the analysts should translate the business goal into the analytical approach needed to solve these problems.

In doing so, the analyst needs to be able to explain the potential impacts, the difficulty, costs and data requirements of each project, while the business stakeholders need to consider the potential roadblocks to operationalising the results of the analytical project to improve the business.

There also needs to be a business owner who is willing and empowered to make difficult decisions about which projects to invest in. One approach is to treat the analytics projects in the way that venture capitalists would treat their portfolio of investments. That is, to invest in numerous projects, knowing that some projects will not pay out; some will have a marginal benefit and a few will yield a big profit.

An alternative approach is to use data visualisation techniques and simply leave the analyst alone to find patterns and trends. These are both valid approaches. However, analytics must be directed at a problem.

“Like most business problems, analytics should form part of an iterative journey.”

CMOImprove

profitability, customer

experience and market

differentation

CROOptimise

operational, liquidity, market and credit risk competencies

COOModernise and

rationalise legacy operations to enable integrated reporting

and quality data

CFOComply with

Solvency II, Basel III, IFRS and a growing

list of local and global regulations

Business leadersEnhance

shareholder value

CIOSimplify, consolidate and reduce costs to improve total cost

of ownership

CustomersImprove service

and multichannel experience

Organisational prioritiesDifferent board members have different objectives when it comes to using data


following the route of establishing an internal ‘data science lab’ enabled by big data, where various sources of data can be efficiently sourced, stored and leveraged for initial exploration and hypothesis testing, using the Agile approach. This allows the formulation of use case scenarios around specific business issues, and enables cost–benefit analysis for earlier and more efficient analytics activities.

The key to success with big data and analytics is to make sure we understand the business problem, delving beyond high–level issues, such as missing revenue targets or maximising profitability. Behind the headline issues are business needs and operational changes which may be required, an understanding of which can be used to scope out the necessary analytics. Performing these changes using the Agile method leads to accelerated results and quick realisation of the value of big data analytics. GI

creating a virtuous circle. The results of analytics projects can be fed directly into the business and taken up by stakeholders to act upon in an appropriate manner, enabling early hypothesis testing and quick identification of ‘unknown unknowns’, which ultimately increase the value that the business is able to extract from its data and analytics capabilities.

Embracing big dataBig data is a set of capabilities to leverage large volumes of structured and unstructured data to solve business issues. With these new capabilities, we should therefore look to view our business questions through different lenses and question whether the current solutions to business problems are the most efficient.

For example, a typical challenge is to maximise the profitability of an individual line of business (or product). However, should the challenge be how to maximise profits across all lines of businesses for a customer? Could we use big data to identify and carry out analytics to help shape the differences between the insurer’s view of the world and that of the customer?

At its heart, big data enables analytics to leverage higher volumes of granular internal and external data captured in real time to address a broad set of business questions, including customer servicing, risk measurement and management, product innovation and stress testing.

Its technologies support rapid and low–cost deployment. Organisations are increasingly

Sherdin OmarSherdin Omar, Senior Manager, Retail [email protected] Tel + 44 20 7951 7840

• Develop a set of statements that establishes the issue and the desired target state which will drive the key areas of focus and scope

• Identify the drivers that influence the issue and the metrics to measure these

• Identify which business processes are involved

• What are the analytical models needed?

• What skills do we need, and which tools?

• What is the delivery model?

• Identify the high–level data requirements

• What delivery model is needed?

Issue statement and target state

Value drivers and business processes Analytical capability Data capability Roadmap

• What are the solution components (across people, process, technology, analytics and governance) that must be delivered and their dependencies?

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“The industry needs to work out how to get value from the £180m annual Flood Re levy.”

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A world first

An interview with Brendan McCafferty, CEO Flood Re

Flood Re is putting in place game-changing plans to provide affordable insurance for 500,000 UK homes at risk of flooding.

by allowing them to grow their share in this market. So what does that mean for those players? Equally, if you have a levy based on market share — which is 5%, say — but you only have 2% of the flood market, your levy will be based on the 5% and there’s going to be a direct hit to your P&L account every year. Surely you need your flood share to be 5% to break even, so how are you going to do that?

There is a channel dimension as well. For example, where will business go if we have a situation where direct channels are ready but broker channels are not? In the past, people have been unable to move successfully in the marketplace because of availability and affordability. But if they suddenly realise they can move, then market forces will take their effect. So it’s not just about the technical specifications. It’s also about working out the commercial response.

What are the biggest technical challenges you face?The first is the PRA application. I’ve learned that it directs you and your

attention to the things you ought to concentrate on, and primarily that’s around understanding the exposure you plan to bring into the business. It also requires you to understand the extent to which you might be wrong and to work out how to deal with that uncertainty in the business model and from a capital perspective.

When you are thinking about expressing the extent of that risk in a one in 200 situation, the data doesn’t exist. The catastrophe modelling isn’t sophisticated enough to give you the answer, so there is a great deal of judgement involved and you need to have a plan for managing the downside. Our partners have done a tremendous job since January in assisting us and have tremendous insight into the catastrophe modelling and the actual incurred claims experience of many insurers.

What’s your timeframe for going live?We will complete the build of Flood Re by the summer, and industry testing will follow. Launch will happen when this is successfully completed.


“We have made great progress at this end, and now the industry needs to build from the other side.”

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As CEO of Flood Re, Brendan McCafferty has the unenviable task of putting in place plans for a workable UK flood insurance model. With over 30 years’ experience in insurance, broking and advisory, Brendan

is certainly suited to the job — but the challenges he faces are significant.

What is your elevator pitch for Flood Re?It’s all about customers. Hundreds of thousands of people in the UK live in areas that have a high risk of flooding, and it is increasingly difficult for them to find affordable insurance. So, put quite simply, Flood Re will resolve this. It’s a real solution to a problem that has weighed heavily on the insurance industry and has received a great deal of political attention.

What progress have you made this year? It has certainly been a busy start to the year, and since January we have already delivered against a number of key milestones in setting up the arrangement. We have appointed Capita as our managing agent who will build the infrastructure for Flood Re, and Guy Carpenter as our reinsurance broker. We have appointed our Chairman, CFO and Chief Actuary and have begun to put in place a robust programme and the plans that will successfully build and launch Flood Re this year. We also got the secondary legislation laid in Parliament last week — something we have been focussed on for four months and that results from long and hard negotiation with Government.

What’s involved in building Flood Re?The first step will be completing the Prudential Regulation Authority (PRA) application. Beyond that, it is about really engaging with the industry to make sure they understand enough about Flood Re to ensure it is not only a success for customers, but also a commercial success. Insurers need to be properly armed with the knowledge and understanding of how the scheme works to be able to make practical

decisions about how to best respond. We will make information available about the technical specifications that will allow the industry to build their response and plug into Flood Re so they can take the benefits to their customers. It is all about being joined up, and not just implementing a technical solution.

What do you mean by ‘technical specifications’?Just because flood does not dominate the news agenda does not mean that it has not happened — severe weather can hit any town or village across the country and result in Flood Re claims. But it will not just be the big catastrophe-type events: we expect to be paying out on attritional losses as well. Flood Re acts as a traditional insurer, but it has got to accept ceded business. Paying claims results in retrocession payments from the reinsurance market, so the industry needs to understand the technical dimensions this brings with it — the definitions, formats and the technology dimensions, so that they can plug into it successfully.

Is Flood Re just a financial burden on the industry?The industry needs to work out how to get value from the £180m annual Flood Re levy. To put that in context, the underwriting profit from the UK household market has been £400m for the last three years. What’s the equivalent number for the last 10 years? It’s £400m. And we are going to collect £180m every year. So the industry has to work out how it is going to get value from the levy. Primarily that’s going to be about how they cede business successfully to lay off the risk of flood and either protect or increase their volume in the marketplace.

What impact will Flood Re have on the market?Flood Re has the potential to make a significant impact on the market. A lot of underwriters quite understandably treat flood claims as niche, but Flood Re could change this, which could benefit insurers

Brendan McCafferty took the helm at Flood Re in 2014


have been holding a number of informative events since the end of March, which cover what Flood Re is and how it will operate. Following this, we will publish the technical specifications, dimensions and definitions of the scheme that the industry will require to initiate or complete the build activity that needs to happen.

What’s the most important lesson you have learnt so far?The need to be clear about your objective and mandate. Without that clarity of thinking, it would not be difficult to be blown off course. Flood Re will make huge and real–life difference to hundreds of thousands of families across the UK. I take both comfort and energy from knowing how worthy and necessary it is for both households struggling with the consequences of flooding, and the industry in providing a workable solution to a long–standing problem.

Rolling out a scheme like this one requires real clarity in the objective, and an ability to not only solve the problems which arise along the way, but to also bring people along with you on the journey. Being the CEO of Flood Re is something I am exceptionally proud of, and is a real career high for me. GI

What issues have you had to overcome in negotiations with the Government and the insurance industry?The difficulties were around the Government’s appetite to have a public body that gets consolidated into the public accounts with the ability to produce a loss of several hundred million pounds, which it has the potential to do. The sums insured in Flood Re could be £70bn–£100bn. That was their principal concern. We reached a deal with Goverment before Christmas that resolved that.

From the industry perspective, Flood Re is a world first. It has this ability, at the discretion of the directors, to be able to call a second levy from the industry in order to protect its capital position. I can’t think of any other example where an independent body can effectively call on the balance sheets of insurance companies without limitation, so we have made sure the industry has a voice on what happens. It is a collaborative scheme designed to protect customers and insurers.

You say Flood Re is a world first. In what way?Firstly, it’s attritional. You could draw parallels with other peril pools across the globe, but what’s unique about us is that we are primarily consumer focussed and we have that exposure to attritional loss. The scheme occupies the full value chain of the reinsurance proposition, which is a new concept, and it has a statutory footing with a subsidy — that’s pretty unique too. One of Flood Re’s obligations is to manage a transition to normal market conditions over a period of 25 years.

What mechanisms do you have in place to support the industry and help it understand the impact of Flood Re?Using the analogy of building the Channel Tunnel, we have made great progress at this end, and now the industry needs to build from the other side to make it work. We

Tony SaultExecutive Director, General [email protected] Tel + 44 20 7951 5836


Simon Burtwell, UK Partner and General Insurance [email protected] Tel: + 44 20 7951 0532 Graham Handy, UK Partner and EMEIA Insurance Risk [email protected] Tel: + 44 20 7951 8173 Chris Lamberton, UK Partner, Performance [email protected] Tel: + 44 20 7951 1963 Jeff Soar, UK Partner, Transaction [email protected] Tel: + 44 20 7951 6421 David Foster, UK Partner, Financial and Accounting [email protected] Tel: + 44 20 7951 5687

Kevin Griffith, UK Partner, Financial and Accounting [email protected] Tel: + 44 20 7951 0905 Jenny Coletta, UK Partner, International Tax [email protected] Tel: + 44 20 7951 5993 Imran Ahmed, UK Partner, Performance [email protected] Tel: + 44 20 7951 1882 Tony Sault, Executive Director, General [email protected] Tel: + 44 20 7951 5836

Steve Southall, Executive Director, Regulatory [email protected] Tel: + 44 20 7951 1004 Ian J Robinson, Senior Manager, Performance [email protected] Tel: + 44 20 7951 6106 John Cooper, Senior Manager, Performance [email protected] Tel: + 44 113 298 2471 Sherdin Omar, Senior Manager, Retail [email protected] Tel: + 44 20 7951 7840

Richard Read, Senior Manager, Retail [email protected]: + 44 20 7951 8713

Key contacts

Content Director Tim TurnerArt Director Daniel CoupeSenior Account Director Emma FisherCreative Director Ben BarrettProduction Jack MorganProduction Director John FaulknerManaging Director Claire OldfieldCEO Martin MacConnol

For EYTony Sault, Editor and Executive Director, General InsuranceWayne D’Aranjo, Manager, Brand, Marketing and Communications, EMEIA Financial Services

General Insurance Journal: Insights into a changing market is published on behalf of EY by:

WardourDrury House34–43 Russell StreetLondon WC2B 5HAUnited KingdomTel: + 44 20 7010 0999wardour.co.uk

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organisation and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com.

© 2015 EYGM Limited.All Rights Reserved.

EYG no. EG0275

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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