Tag Archives: galeaz

Insurance M&A: Just Beginning

Insurance M&A activity in the U.S. rose to unprecedented levels in 2015, surpassing what had been a banner year in 2014. There were 476 announced deals in the insurance sector, 79 of which had disclosed deal values with a total announced value of $53.3 billion. This was a significant increase from the 352 announced deals in 2014, of which 73 had disclosed deal values with a total announced value of $13.5 billion. Furthermore, unlike prior years, where U.S. insurance deal activity was isolated to specific subsectors, 2015 saw a significant increase in deal activity in all industry subsectors.

The largest deal of the year occurred in the property & casualty space when Chubb Corporation agreed on July 1 to merge with Ace. The size of the combined company, which assumed the Chubb brand, rivals that of other large global P&C companies like Allianz and Zurich. This merger by itself exceeded the total insurance industry disclosed deal values for each of the previous five years and represented 53% of the total 2015 disclosed deal value for the industry. However, even without the Chubb/Ace megamerger, total 2015 deal value was still nearly double that of 2014.

See Also: Insurance Implication in Asia Slowdown

While the insurance industry saw a significant increase in megadeals in 2015, there also was a significant increase in deals of all sizes across subsectors.

Tokio Marine & Fire Insurance’s acquisition of HCC Insurance Holdings, announced in June 2015, was the second largest announced deal, with a value of $7.5 billion. The purchase price represented a 36% premium to market value before the deal announcement.

The largest deal in the life space (and third largest deal in 2015) was Meiji Yasuda Life Insurance’s acquisition of Stancorp Financial Group for $5 billion. The purchase price represented 50% premium to market value prior to the deal announcement and continued what now appears to be a trend with Asian-domiciled financial institutions (particularly from Japan and China) acquiring mid-sized life and health insurance companies by paying significant premiums to public shareholders.

The fourth and fifth largest announced deals in 2015 were very similar to the Stancorp acquisition. They also were acquisitions of publicly held life insurers by foreign-domiciled financial institutions seeking an entry into the U.S. In each of these instances, the acquirers paid significant premiums.

In 2014, we anticipated this trend of inbound investment – particularly from Japan and China – and expect it to continue in 2016 as foreign-domiciled financial institutions seek to enter or expand their presence in the U.S.

Independent of these megadeals, the overwhelming number of announced deals in the insurance sector relate to acquisitions in the brokerage space. These deals are significant from a volume perspective, but many are smaller transactions that do not tend to have announced deal values.

In addition, there were a number of transactions involving insurance companies with significant premium exposure in the U.S., but which are domiciled offshore and therefore excluded from U.S. deal statistics. Some examples from 2015 include the acquisition of reinsurer PartnerRe by Exor for $6.6 billion, the $4.1 billion acquisition of Catlin Group by XL Group and Fosun’s acquisition of the remaining 80% interest of Ironshore for $2.1 billion.

See Also: New Approach to Risk and Infrastructure?

Drivers of deal activity

  • Inbound foreign investment – Asian financial institutions looking to gain exposure to the U.S. insurance market made the largest announced deal of 2014 and four of the five largest announced acquisitions in the insurance sector in 2015. Their targets were publicly traded insurance companies, which they purchased at significant premiums to their market prices. Foreign buyers have been attracted to the size of the U.S. market and have been met by willing sellers. Aging populations, a major issue in Japan, Korea and China, as well as an ambition to become global players, will continue to drive Asian buyer interest in the U.S. However, the ultimate amount of foreign megadeals in the U.S. may be limited by the number of available targets that are of desired scale and available for acquisition.
  • Sellers’ market – Coming out of the financial crisis, there were many insurance companies seeking to sell non-core assets and capital-intensive products. This created opportunities for buyers, as these businesses were being liquidated well below book values. Starting in 2014, the insurance sector became a sellers’ market (as we mention above, largely because of inbound investment). Many of the large announced deals in 2015 involved companies that were not for sale but were the direct result of buyers’ unsolicited approaches. This aggressiveness and the significant market premiums that buyers have paid on recent transactions should be cause for U.S. insurance company boards to reassess their strategies and consider selling assets.
  • Private equity/family office – Private equity demand for insurance brokerage companies continued in 2015, even as transaction multiples and valuations of insurance brokers increased significantly. However, we have also seen increased interest among private equity investors in acquiring risk-bearing life and P&C insurance companies. This demand has grown beyond the traditional PE-backed insurance companies that have focused primarily on fixed annuities and traditional life insurance products. Examples include: 1) Golden Gate Capital-backed Nassau Reinsurance Group Holdings’ announced acquisition of both Phoenix Companies and Universal American Corp.’s traditional insurance business; 2) HC2’s acquisition of the long-term care business of American Financial Group Inc.: and 3) Kuvare’s announced acquisition of Guaranty Income Life Insurance. We anticipate private equity activity will continue in both insurance brokerage and carrier markets in 2016.
  • Consolidation – While there has been some consolidation in the insurance industry over the past few years, it has been limited primarily to P&C reinsurance. With interest rates near historic lows and minimal increases in premium rates over the last few years, we expect the economic drivers of consolidation to increase in the industry as a whole as companies seek to eliminate costs to grow their bottom lines.
  • Regulatory developments – MetLife recently announced plans to spin off its U.S. retail business in an effort to escape its systemically important financial institution (SIFI) designation and thereby make the company’s regulatory oversight consistent with most other U.S. insurers’. MetLife’s announcement was followed by fellow SIFI AIG’s announcement that it intended to divest itself of its mortgage insurance unit, United Guaranty. The two other non-bank financial institutions that have been designated as SIFIs, GE Capital and Prudential Financial, have differing plans. While GE Capital has been in the process of divesting most of its financial services businesses, Prudential Financial has yet to announce any plans to sell assets. In other developments, the new captive financing rules the NAIC enacted in 2015 and the implementation of Solvency II in Europe may put pressure on other market participants to seek alternative financing solutions or sell U.S. businesses in 2016 and beyond.
  • Technological innovations – The insurance industry historically has lagged behind other industries in technological innovation (for example, many insurance companies use multiple, antiquated, product-specific policy administration systems). Unlike in banking and asset management, which have been significantly disrupted by technology-driven, non-bank financing platforms and robo-advisers, the insurance industry has not yet experienced significant disruption to its traditional business model from technology-driven alternatives. However, we believe that technological innovations will significantly alter the way insurance companies do business – likely in the near future. Many market participants are focusing on being ahead of the curve and are seeking to acquire technology that will allow them to meet new customer needs while optimizing core insurance functions and related cost structures.


  • We expect inbound foreign investment – especially from Japan and China – to continue fueling U.S. deals activity for the foreseeable future. If there is an impediment to activity, it likely will not be a lack of ready buyers but instead a lack of suitable targets.
  • Private equity will remain an important player in the deals market, not least because it has expanded its targets beyond brokers to the industry as a whole.
  • The need to eliminate costs to grow the bottom line will remain a primary economic driver of consolidation.
  • Regulatory developments are driving divestments at most, though not all, non-bank SIFIs. This remains a space to watch, as a common insurance industry goal is to avoid federal supervision.
  • Actual and impending technological disruption of traditional business models is likely to lead to increased deal activiy as companies look to augment their existing capabilities and take advantage of – rather than fall victim to – disruption.

Cyber: A Huge and Still-Untapped Market

Cyber insurance is a potentially huge, but still largely untapped, opportunity for insurers and reinsurers. We estimate that annual gross written premiums are set to increase from around $2.5 billion today to reach $7.5 billion by the end of the decade.

Businesses across all sectors are beginning to recognize the importance of cyber insurance in today’s increasingly complex and high-risk digital landscape. In turn, many insurers and reinsurers are looking to take advantage of what they see as a rare opportunity to secure high margins in an otherwise soft market. Yet many others are still wary of cyber risk. How long can they remain on the sidelines? Cyber insurance could soon become a client expectation, and insurers that are unwilling to embrace it risk losing out on other business opportunities.

In the meantime, many insurers face considerable cyber exposures within their technology, errors and omissions, general liability and other existing business lines. The immediate priority is to evaluate and manage these “buried” exposures.

Critical exposures

Part of the challenge is that cyber risk isn’t like any other risk that insurers and reinsurers have ever had to underwrite. There is limited publicly available data on the scale and financial impact of attacks. The difficulties created by the minimal data are heightened by the speed with which the threats are evolving and proliferating. While underwriters can estimate the likely cost of systems remediation with reasonable certainty, there simply isn’t enough historical data to gauge further losses resulting from brand impairment or compensation to customers, suppliers and other stakeholders.

A UK government report estimates that the insurance industry’s global cyber risk exposure is already in the region of £100 billion ($150 billion), more than a third of the Centre for Strategic and International Studies’ estimate of the annual losses from cyber attacks ($400 billion). And while the scale of the potential losses is on a par with natural catastrophes, incidents are much more frequent. As a result, there are growing concerns about both the concentrations of cyber risk and the ability of less experienced insurers to withstand what could become a fast sequence of high-loss events.

Insurers and reinsurers are charging high prices for cyber insurance relative to other types of liability coverage to cushion some of the uncertainty. They are also seeking to put a ceiling on their potential losses through restrictive limits, exclusions and conditions. However, many clients are starting to question the real value these policies offer, which may restrict market growth.

Insurers and reinsurers need more rigorous and relevant risk evaluation built around more reliable data, more effective scenario analysis and partnerships with government, technology companies and specialist firms. Rather than simply relying on blanket policy restrictions to control exposures, insurers should make coverage conditional on regular risk assessments of the client’s operations and the actions they take in response to the issues identified in these regular reviews. The depth of the assessment should reflect the risks within the client’s industry sector and the coverage limits.

This more informed approach would enable your business to reduce uncertain exposures while offering the types of coverage and more attractive premium rates clients want. Your clients would, in turn, benefit from more transparent and cost-effective coverage.

Opportunities for Growth

There is no doubt that cyber insurance offers considerable opportunity for revenue growth.

An estimated $2.5 billion in cyber insurance premium was written in 2014. Some 90% of cyber insurance is purchased by U.S. companies, underlining the size of the opportunities for further market expansion worldwide.

In the UK, only 2% of companies have standalone cyber insurance. Even in the more penetrated U.S. market, only around a third of companies have some form of cyber coverage. There is also a wide variation in take-up by industry, with only 5% of manufacturing companies in the U.S. holding standalone cyber insurance, compared with around 50% in the healthcare, technology and retail sectors. As recognition of cyber threats increases, take-up of cyber insurance in under-penetrated industries and countries continues to grow, and companies face demands to disclose whether they have cyber coverage (examples include the U.S. Securities and Exchange Commission’s disclosure guidance).

We estimate that the cyber insurance market could grow to $5 billion in annual premiums by 2018 and at least $7.5 billion by 2020.

There is a strong appetite among underwriters for further expansion in cyber insurance writings, reflecting what would appear to be favorable prices in comparison with other areas of a generally soft market — the cost of cyber insurance relative to the limit purchased is typically three times the cost of cover for more-established general liability risks. Part of the reason for the high prices is the still limited number of insurers offering such coverage, though a much bigger reason is the uncertainty around how much to put aside for potential losses.

Many insurers are also setting limits below the levels sought by their clients (the maximum is $500 million, though most large companies have difficulty securing more than $300 million). Insurers may also impose restrictive exclusions and conditions. Some common conditions, such as state-of-the-art data encryption or 100% updated security patch clauses, are difficult for any business to maintain. Given the high cost of coverage, the limits imposed, the tight attaching terms and conditions and the restrictions on whether policyholders can claim, many policyholders are questioning whether their cyber insurance policies are delivering real value. Such misgivings could hold back growth in the short term. There is also a possibility that overly onerous terms and conditions could invite regulatory action or litigation against insurers.

Cyber Sustainability

We believe there are eight ways insurers, reinsurers and brokers could put cyber insurance on a more sustainable footing and take advantage of the opportunities for profitable growth:

1. Judging what you could lose and how much you can afford to lose

Pricing will continue to be as much of an art as a science in the absence of robust actuarial data. But it may be possible to develop a much clearer picture of your total maximum loss and match this against your risk appetite and risk tolerances. This could be especially useful in helping your business judge what industries to focus on, when to curtail underwriting and where there may be room for further coverage.

Key inputs include worst-case scenario analysis for your particular portfolio. If your clients include a lot of U.S. power companies, for example, what losses could result from a major attack on the U.S. grid? A recent report based around a “plausible but extreme” scenario in which a sophisticated group of hackers were able to compromise the U.S. electrical grid estimated that insurance companies would face claims ranging from $21 billion to $71 billion, depending on the size and scope of the attack. What proportion of these claims would your business be liable for? What steps could you take now to mitigate the losses in areas ranging from reducing risk concentrations in your portfolio to working with clients to improve safeguards and crisis planning?

2. Sharpen intelligence

To develop more effective threat and client vulnerability assessments, it will be important to bring in people from technology companies and intelligence agencies. The resulting risk evaluation, screening and pricing process would be a partnership between your existing actuaries and underwriters, focusing on the compensation and other third-party liabilities, and technology experts who would concentrate on the data and systems area. This is akin to the partnership between CRO and CIO teams that are being developed to combat cyber threats within many businesses.

3. Risk-based conditions

Many insurers now impose blanket terms and conditions. A more effective approach would be to make coverage conditional on a fuller and more frequent assessment of the policyholder’s vulnerabilities and agreement to follow advised steps. This could include an audit of processes, responsibilities and governance within your client’s business. It could also include threat intelligence assessments, which would draw on the evaluations of threats to industries or particular enterprises, provided by government agencies and other credible sources. It could also include exercises that mimic attacks to test weaknesses and plans for response. As a condition of coverage, you could then specify the implementation of appropriate prevention and detection technologies and procedures.

Your business would benefit from a better understanding and control of the risks you choose to accept, hence lowering exposures, and the ability to offer keener pricing. Clients would in turn be able to secure more effective and cost-efficient insurance protection. These assessments could also help to cement a closer relationship with clients and provide the foundation for fee-based advisory services.

4. Share more data

More effective data sharing is the key to greater pricing accuracy. Client companies have been wary of admitting breaches for reputation reasons, while insurers have been reluctant to share data because of concerns over loss of competitive advantage. However, data breach notification legislation in the U.S., which is now set to be replicated in the EU, could help increase available data volumes. Some governments and regulators have also launched data sharing initiatives (e.g., MAS in Singapore or the UK’s Cyber Security Information Sharing Partnership). Data pooling on operational risk, through ORIC, provides a precedent for more industry-wide sharing.

5. Real-time policy update

Annual renewals and 18-month product development cycles will need to give way to real-time analysis and rolling policy updates. This dynamic approach could be likened to the updates on security software or the approach taken by credit insurers to dynamically manage limits and exposures.

6. Hybrid risk transfer

While the cyber reinsurance market is less developed than its direct counterpart, a better understanding of the evolving threat and maximum loss scenarios could encourage more reinsurance companies to enter the market. Risk transfer structures are likely to include traditional excess of loss reinsurance in the lower layers, with capital market structures being developed for peak losses. Possible options might include indemnity or industry loss warranty structures or some form of contingent capital. Such capital market structures could prove appealing to investors looking for diversification and yield. Fund managers and investment banks can bring in expertise from reinsurers or technology companies to develop appropriate evaluation techniques.

7. Risk facilitation

Given the ever more complex and uncertain loss drivers surrounding cyber risk, there is a growing need for coordinated risk management solutions that bring together a range of stakeholders, including corporations, insurance/reinsurance companies, capital markets and policymakers. Some form of risk facilitator, possibly the broker, will be needed to bring the parties together and lead the development of effective solutions, including the standards for cyber insurance that many governments are keen to introduce.

8. Build credibility through effective in-house safeguards

The development of effective in-house safeguards is essential in sustaining credibility in the cyber risk market, and trust in the enterprise as a whole. If your business can’t protect itself, why should policyholders trust you to protect them?

Banks have invested hundreds of millions of dollars in cyber security, bringing in people from intelligence agencies and even ex-hackers to advise on safeguards. Insurers also need to continue to invest appropriately in their own cyber security given the volume of sensitive policyholder information they hold, which, if compromised, would lead to a loss of trust that would be extremely difficult to restore. The sensitive data held by cyber insurers that hackers might well want to gain access to includes information on clients’ cyber risks and defenses.

The starting point is for boards to take the lead in evaluating and tackling cyber risk within their own business, rather than simply seeing this as a matter for IT or compliance.

See the full report here.

Modernization: IT Enables the Future

Finance functions and actuaries face regulatory pressure to enhance reporting, markedly improve response times and provide increasingly demanding business partners with better and more actionable information about their businesses. Advanced analytics from IT improvements will help achieve the strategic objectives.

Naturally, insurers should provide themselves with the best reporting platform they can reasonably afford. However, unlike in years past, cutting-edge reporting is just table-stakes, not a competitive advantage. Rather, competitive advantage will come from:

  • An information strategy that enables transparent and compliant financial analysis and facilitates the ability to make informed business decisions.
  • Information management capabilities that are foundational and support finance (broadly defined) and the business overall.
  • Establishing a clear and practical vision: Identifying what will make the vision a reality will enable organizations to create a road map for change.
  • Gauging the appropriate spending rate to determine how quickly the company can implement the roadmap.

Companies that do not go beyond their reliance on core reporting systems for their financial insight will be at a competitive disadvantage. There is no silver bullet for building needed capabilities, and companies will need to rethink their IT portfolio allocations and approach to spending. A steady investment will help companies build their strategic information infrastructure and effectively assess their needs on an iterative basis.

The case for change

Many insurance companies have invested in cleaning data for the purpose of reporting and analysis. Whether your company has started doing this or not, the following are important considerations to keep in mind:

  • No organization has the financial resources to cleanse and array all the data and information it may ever want and make it available whenever it wants it. Efforts to boil the ocean fail.
  • Companies will need to build capabilities in three areas:

–        Develop focused information strategies to support actuaries, financial executives and the other people in the organization who rely on financial and reporting information.

–        Frame the future-vision build and fund a flexible road map for implementation. Ensure that the road map prioritizes the most important things first and that it can change to meet new demands and realities as they arise.

–        Manage data and information, including data ownership, data governance and the ability to cleanse and provide the data in such a way that it can be presented in advanced tools and manipulated by end-users, while maintaining integrity in the source-information.

  • Companies currently spend a great deal of time and money on information management, but the information tends to reside in disconnected platforms, projects, data-bases and tools. Investment levels need to match the company’s vision, and there needs to be an organizational awareness that combining disparate efforts into a cohesive information strategy can partially offset high costs.
  • While finance and actuarial are the primary drivers of insurance modernization because of their needs to report and book results, there is a related need for all business partners to supply, receive, analyze and explain financial and related operating data.
  • Furthermore, insurance modernization will create the foundation for an enterprise-wide range of data and analytics. HR, marketing, customer, distributor and operations information and analytics all will rely on the same core capabilities, disciplines and infrastructure. A uniform approach is what will provide a real competitive advantage.

Characteristics of a modernized company

In a modernized company, a synergy of efficient, well-tuned processes with clearly defined expectations by stakeholder group exists between the risk, finance, actuarial and IT functions.

  • Data – Data strategy is defined, and the organization executes its responsibilities according to this strategy. Rather than the traditional bottom-up data approach where the analysis capabilities flow from the collected data, data is strategically viewed top-down. The company identifies analytical needs and then adopts a data strategy that supports them. In a modernized company, data flows from a “single source of the truth” and can be extracted for analytical purposes with minimal manual intervention.
  • Tools & technology – Tools and technology enhance the effectiveness of the finance and actuarial departments by providing them information faster, more accurately and more transparently than traditional ad hoc, end user computing analyses (usually performed in Excel). Specifically, tools that focus on data visualization can more effectively convey trends and results to management. Algorithms can be programmed to automate first-cut reserving analyses each quarter based on a rules engine (e.g., how loss development factors are selected or weighting methodologies), which can help point staff to business segments that may require deeper analysis in the quarter.
  • Methods & analysis – Modernized organizations emphasize robust methods and analysis that yield superior insights over traditional methods. Examples include predictive analytics, which have transformed personal lines pricing and are currently being adopted in the commercial arena, and stochastic analysis, which adds additional statistical rigor to deterministic analysis and thereby helps actuaries transparently prepare reserve range indications that help management understand reserve risk.
  • Organizational structure – Delivering superior business intelligence to management is often dependent on organizational structure and resources, and many companies are debating the merits of centralized, decentralized or hybrid organizational structures. PwC believes the organization of the future will align its capabilities as much as possible with the end-user, with IT serving as a backstop that can provide what end-users need.
  • Spending – A concerted, cohesive insurance modernization program will require a change in the portfolio spending on information management. Spending will change from covering disparate efforts to strategically aligned ones.

The benefits

The primary benefit of insurance modernization is better and more responsive reporting, actuarial analysis and the ability to support financial decisions. The second, and perhaps more critical benefit, is improved analytics and decision making for the rest of the organization. More specifically, insurance modernization:

  • Aligns data management initiatives and governs the success of their implementation by clearly articulating both the company’s strategic mission and a measurable definition of success.
  • Aligns projects and initiatives with desired outcomes by creating a road map with measurable milestones from vision to project completion.
  • Facilitates prioritization of capabilities and initiatives based on overall goals and objectives, as well as realizable benefit.
  • Measures the business value of initiatives and projects by linking desired outcomes (goals) and measuring progress against objectives.
  • Enables measurement of program progress during rollout and informs the release planning and investment process by linking performance indicators and objectives.

The thought of potentially overhauling entire systems, processes and functional areas may understandably seem overwhelming for company executives as they set out to modernize their organizations. Modernization, indeed, is a long journey that will most likely have a high price tag. However, even if the ideal goal of modernization is holistic improvement, there is value in identifying the individual areas that most need modernization. As one area becomes more streamlined and efficient, then other areas will begin to reap the benefits.

Critical success factors

Business leaders are frequently frustrated by the fact that tactical initiatives’ results do not reflect their organizations’ mission or vision. Frequently, strategic goals are mistranslated or forgotten when it comes to defining and developing how to achieve them. In addition, efforts to improve organizational effectiveness tend to focus narrowly on the execution of existing tasks. As a result, functional improvement efforts often fail to result in meaningful benefits for the organization overall.

Strategic business architecture (SBA), which we advocate using, translates high-level business direction into tangible goals and objectives. SBA documents business-driven priorities and decisions and aligns projects and initiatives with desired outcomes. As a result, business and technology leaders can prioritize initiatives and measures their progress.

At the same time, operational business architecture (OBA) documents how functions and the overall organization realize business strategy and goals. OBA helps improve the functional core by identifying relevant stakeholders within the context of the larger architecture. OBA aligns operational stakeholders in a consistent way with the strategic and technical stakeholders that may not be involved in a given functional or process improvement initiative.

Call to action – Next steps

Insurance modernization is not about technology modernization for its own sake. It is about how technology can enable risk, actuarial and finance to share a “single source of the truth” and serve the entire enterprise with consistent, actionable information.

Strategies to realize effective organizational modernization will require a holistic consideration of all data, methods/analyses, tools/technology, processes and human-capital requirements and will need to address the business and operational changes necessary to deliver new business intelligence metrics. Any weak links between these closely connected components will limit the effective realization of a modernization effort.

If we view dimensions of insurance modernization as gears that spin together (i.e., efficiencies/ inefficiencies in one dimension(s) have repercussions for other dimensions), then improvements in any dimension will yield improvements in all dimensions and vice versa.

Although a modernization vision should be holistic to avoid “digging up the road multiple times,” it is possible to tackle modernization issues in logical, progressive ways.

The Case for Modernizing Insurance

Several drivers of change are compelling insurance companies to re-evaluate and modernize all aspects of their business model and operations. These drivers include new and rigorous expectations from regulators and standards, increasing demands for more relevant and useful information, improvements in analytics and the need for operational transformation.

The modernization creates considerable expectations for finance, risk and actuarial functions, and potentially significant impacts to business strategy, investor education, internal controls, valuation models and the processes and systems underlying each – as well as other fundamental aspects of the insurance business. Accordingly, insurers need more sophisticated financial reporting, risk management and actuarial analysis to address complex measurement and disclosure changes, regulatory requirements and market expectations.

Three key areas to look at:

Regulation and reporting

Changes in regulatory and reporting requirements will place greater demands on finance, risk and actuarial functions. Issues include:

  • Changing global and federal regulation (e.g., Federal Insurance Office, Federal Reserve oversight)
  • ComFrame, a common framework for international supervision.
  • Principle-based reserving
  • Own Risk and Solvency Assessment (ORSA), the Solvency II initiative that defines a set of processes for decision-making and strategic analysis
  • Solvency reporting measures
  • Insurance contract accounting

Information and analytics

Stakeholders are demanding more information, and boards and the C-suite need new and more relevant metrics to manage their businesses. Issues include:

  • Economic capital
  • Embedded value
  • Customer analysis and behavioral simulation
  • New product and changing underwriting parameters

Operational transformation

Those in charge of governance are demanding that the data they use to manage risk and make decisions be more reliable and economical. Issues include:

  • Updated target operating models
  • Centers of excellence
  • Enterprise risk management (ERM), model risk management and governance
  • New framework from the Committee of Sponsoring Organizations (COSO), a joint initiative of five private-sector organizations that provides thought leadership on ERM, internal controls and fraud deterrence
  • Optimization of controls, and efficiency studies

These drivers of change, which affect every facet of the business — from processes, systems and controls to employees and investor relations — have significant overlaps, and insurers cannot deal with them in isolation. To meet emerging challenges and requirements, simply adding processes or making one-off, isolated changes will not work.

Systems, data and modeling will have to improve, and the finance, actuarial and risk functions will need to work together more closely and effectively than they ever have before to meet new demands both individually and as a whole.

Moreover, all of this change is imminent: Over the next five years, leading companies will separate themselves from their competitors by fully developing and implementing consistent data, process, technology and human resource strategies that enable them to meet these new requirements and better adapt to changing market conditions.

The insurers that wind up ahead of the game will excel at creating timely, relevant and reliable management information that will provide them a strategic advantage. Legacy processes and systems will not be sufficient to address pending regulatory and reporting changes or respond to market opportunities, competitive threats, economic pressures and stakeholder expectations. Companies that do not respond effectively will struggle with sub-par operating models, higher capital costs, compliance challenges and an overall lack of competitiveness.

In subsequent articles, we will take a closer look at those leaders/business units that need to modernize.

 Eric Trowbridge, a senior manager, contributed to this article.