accenture a new risk adjusted operating model for the insurance industry

7/27/2019 Accenture a New Risk Adjusted Operating Model for the Insurance Industry

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A New Risk-AdjustedOperating Model for

the Insurance Industry



1 New Risk-Adjusted Operating Model

ContentThe New Challenges of Risk 3

Integrating Risk into Key Business Processes 5

Issues in Data Management 6

Comprehensive Technological Solutions 6

II. The Changing Role of Enterprise Risk Management 7

1. Ongoing market pressure

2. Capital market innovations

3. Improved business results through integration of risk andcore business processes

4. Improved internal and regulatory reporting capabilities

III. The Accenture Approach: The Risk-AdjustedOperating Model 9

Targeting and Delivering Value

Diagnosis, Exploration and Blueprint Development

Blueprint

Execution

Benefits from Risk-Adjusted Operating Model 13

Conclusion 14

About the Authors 15



New Risk-Adjusted Operating Model 2

While compliance withregulatory requirementssuch as Solvency II inEurope is a major concern,insurers have begun torecognize that they needmore than just compliance;rather, they shouldconsider far-reaching,risk-focused businesssolutions to improve theircompetitive position.

Achieving full compliancethrough transformationof Enterprise RiskManagement (ERM)functions will be a complexand costly undertaking,that may require extensiveinvestment to supportlong-term, profitablegrowth. Accenture believesthat, by aligning riskwith overall strategy and

integrating it into keybusiness processes, thisobjective is supportedmost effectively. We havetermed our approachthe Accenture Risk-Adjusted Operating Model(RAOM), designed to helpinsurers improve their riskcapabilities to generateadditional value whilereducing costs.

It has become clear - in the face of new regulatory andeconomic pressures – that insurers should increase their abilityto make risk-based decisions by incorporating risk managementinto key business processes.




The New Challenges of RiskAnalysts, regulators and rating agencies are developing new guidelines and assessmentcriteria, including risk management capabilities and practices, in evaluating the soundnessand integrity of insurers and the level of protection afforded to their policyholders.




Accenture’s 2011 Global Risk Study– conducted with C-Level executivesat 48 global insurers – indicated thatinsurers see improving risk measurementand modeling, reducing the cost of risk management compliance, andintegrating risk and finance informationand processes within the organizationas the most significant challengesthey face. The insurers also want toimprove their risk capabilities in internalreporting, risk-adjusted performancemanagement, and the integration of

finance and risk. (Figure 1)

The new regulatory requirementsincrease costs related to riskmanagement. In particular, insurersshould consider improving theirquantitative and qualitative riskmanagement capabilities; reporting andpublic disclosure; data management;and overall risk governance. To meetregulatory demands, insurers shouldupgrade their data collection, analytics,and reporting capabilities.

The major driver of cost in riskmanagement, however, is inconsistentexecution of risk management in keybusiness processes. The processesneeded to identify, analyze, assess,report and respond to risks relatedto specific areas of responsibilityare complex. Often, a consistent riskmanagement framework – which shouldserve as the base for execution of riskmanagement throughout the entirecompany – is not in place. This createsa situation in which individuals involved

in different processes do not use thesame standards and data for how toidentify and assess risks, and how torespond to these risks once they areidentified. A standardized, integratedapproach to risk management for allbusiness processes –avoiding duplicativeprocesses and unnecessary activities —can help minimize the costs associatedwith inconsistent execution.

Source: Accenture

Figure 1

Key challenges faced by risk management functions

Risk ManagementChallenges

Reducing riskmanagement costs

Aligning risk withthe overall businessstrategy

Data management(availability, consistency,quality)

Need for betterIntegration with keybusiness processes

Improving riskmeasurement andmodeling

Accenture 2011 Global Risk Study confirms that aligning risk with overall strategyand integrating it into key business processes while reducing costs are the keychallenges for the risk organizations




Integrating Risk into Key Business

Processes

Without a company-wide integrationof risk management, information usedto assess risk in one core insuranceprocess may not be available to assessother business opportunities from a risk/reward perspective.

New regulations increase the burdenon insurers to provide complete andtransparent documentation of allprocesses which bear risks. Whilethis can pose a significant challengeto insurers, process documentationalso provides an opportunity reviewthe existing process landscape andcan serve as a mechanism to remodelexisting processes, or even designnew ones.

A formal statement of risk appetite canprovide a strategic direction for businessdecision-making. Such a statement

can generate value by helping alignstrategic objectives with risk tolerances,preventing unwanted risk taking byoperational units and fostering greaterefficiency in the allocation of capital.The risk appetite statement also signalsto stakeholders that the company hasestablished clear boundaries for overallrisk taking.

Developing a formal statement of riskappetite poses challenges of its own.Once the statement is formulated,it should be approved by all boardmembers, and then promoted internallyas guidance for the evaluation of business opportunities, risk assessmentand resource allocation within the entireorganization. In addition, the ongoing

collaboration of risk managementwith front office, distribution, financeand operational functions should besupported by dedicated processes toensure that all business takes placewithin the boundaries established by therisk appetite statement.

Similarly, risk management should beintegrated into strategic planning toensure that investments fully reflect therisks involved. This integration enablesthe company to balance risk and reward

in considering available opportunities.Many companies lack the common riskvocabulary, the shared metrics and keyperformance and risk indicators (KPIs/KRIs) and the firm-wide access to data(along with centralized databases)needed to fully integrate risk andfinancial information.

At many insurers, the organizational structure of the risk management function onlysupports ERM to minimize risks within a particular business process.




Issues in Data Management

Comprehensive Technological

Solutions

Insurers with multiple back-end systems– or with information stored in silos thatare not accessible to groups that mayrequire it – face challenges in providingconsistent, high-quality data to therisk management function. The mainproblem for insurers – once high-qualitydata is obtained -- is the definitionand implementation of a frameworkfor data management to supportboth consistency and quality of datathroughout the organization.

Like data quality, data governanceis very important for the effectivemanagement and use of informationby multiple stakeholders within thecompany. When ownership of data isunclear, redundant data sources maybe in use without clearly assignedresponsibilities as to the manipulation,retention or deletion of data.

As a result, there is a lack of systemsto provide an integrated view of risk. A comprehensive, uniform ITlandscape – reflecting industry-

specific reference architecture as astructure to enhance capabilities – isneeded to support multiple functionsand realize available synergies.

As they contemplate moving to a newrisk adjusted operating model, insurers

should keep in mind the complementarynature of the various elements involvedin the transformation. For example,improvement and integration of

IT architecture supports increasedautomation and makes it easier toprovide robust IT support, which in turnhelps to lower risk management costs.

Within the insurance industry, the sophisticated models needed for effective riskmanagement depend upon the availability of accurate and validated data, properlyorganized and delivered with the right level of detail and granularity.

Many insurance companies operate with a fragmented risk architecture that fails tosupport the full use of risk management tools and models within the context of theoverall business.




II. The Changing Role of Enterprise

Risk Management

The contribution of Enterprise Risk Management (ERM) is changing and growing as theinformation provided by risk management is used to support value generation.

For example, the Chief Operating Officer now takes advantage of risk managementcapabilities by integrating specific processes to support decision-making and valuegeneration. While ERM has been primarily a compliance-driven function that protectsthe value of the enterprise, it is increasingly strategy-driven, with a main focus onmaximizing and not just protecting enterprise value. The redesign of risk managementas a source of competitive advantage is now one of the primary objectives of theinsurance industry, with the potential to enable long-term profitable growth.




Changing regulatory regimes suchas Solvency II set a high priorityon actuarial and risk managementcapabilities. Under Solvency II, theactuarial and risk management functionshave clear roles and responsibilities,which go far beyond standard activitiessuch as risk identification and modeling.The impact of these functions within the

organization and on decision-makingprocesses is high.

There are a number of factorscontributing to this development:

1. Ongoing market pressure

Greater economic volatility in themarkets, accompanied by increaseduncertainty, has generated pressure toimprove risk management capabilities.

Insurers are investing in moresophisticated risk analytics tools toimprove the measurement of rarerisk events that carry a high degreeof severity for their portfolios. Thesetools help, for instance, to reduceunderwriting risk, contributing toprofitable and sustainable growth.Other companies may use sophisticatedERM to create competitive advantage,meaning that insurers might have toimprove their ERM function to stayrelevant in the market as other players

use ERM for sales activities, to gainmarket share, for rating discussions, andother purposes.

2. Capital marketinnovations

New instruments such as mortalitybonds, along with highly risky and/orcomplex assets such as hedge funds andventure capital, call for sophisticated

risk management methods and toolsto provide an accurate picture of risk. These methods and tools willnot only help insurers manage theirexposures more effectively, they willhelp them capitalize on opportunities,improve organizational performanceand, ultimately, enhance long-termshareholder value.

3. Improved businessresults through integrationof risk and core businessprocesses

Overall risk management can beimproved through the consideration

of risk in the decision-making process.For example, an effective integrationof risk-based capital methodologies indecision-making tool kits – requiringhigh data quality and a common metricsystem such as one based on economiccapital – can weigh both the combinedeffects of risk-taking activity and theimpact of such activity on economicvalue. With economic capital models,insurers can optimize capital allocationfrom a strategic risk vs. rewardperspective, and gain a competitive

advantage by leveraging ERM andeconomic capital modeling in theirstrategic decision-making process.

Another source of competitiveadvantage is the integration of risk andfinance processes within core insuranceprocesses. Most insurers have not linkedrisk and adequate pricing with salesbut those who do can gain full use of risk-related information to supportdedicated sales activities. These can

then be tailored to client segments witha better perspective on potential risksand rewards.

The combination of risk-adjustedmetrics, traditional asset and liabilitymanagement, and profitabilityperformance measurements providesthe company with a more balancedview of business performance. Anotherbenefit of integration is consistentdata management between the risk andfinance functions, resulting in lower

costs, reduced financial risk and lowerrequired reserves.

4. Improved internal andregulatory reportingcapabilities

Within the scope of fulfilling riskregulatory reporting requirements theindustry is currently heavily engagedin collecting data and developing/

implementing processes and systemsfor compliance such as quantitativereporting templates (QRT), Solvencyand Financial Condition Report (SFCR)and Regular Supervisory Report(RSR). In addition to these SolvencyII specific requirements, industrywill be challenged shortly to reflectaccounting specifics InternationalFinancial Reporting Standards (IFRS) aswell. By improving internal reportingand operational reporting to support

risk-enhanced core insurance processesit will be crucial to provide consistencytowards regulatory reporting andto make use of investments madein data governance and overall datamanagement. However, as regulatoryreporting and operational reportingon risk-enhanced insurance processes(e.g., product development, pricing)might often have different requirementsconcerning the actuality and granularityof underlying data, industry and ITexperts will be asked to align theseimplementations in a cost efficient andsynergetic manner.




III. The Accenture Approach:

The Risk-Adjusted Operating ModelWe believe that the multiple challenges inherent in integrating and improving riskmanagement are best addressed through a structured yet flexible approach. Thisallows for adaptation to the individual situation of each company and recognizes thematurity level of each company’s risk management capabilities.

Accenture’s approach – which we have termed the Risk-Adjusted Operating Model –seeks to align organization, processes and architecture to ensure the development of robust risk management capabilities and to generate benefits for the business as awhole. This is a step-by-step effort based on client specifics. (Figure 2)




Target and

Deliver Value

High Level Strategic

Assessment

Diagnose and

Explore

Gap Analysis and

Closure Approach

Blueprint

Solutions Design

Execute

Implement changes

Delivering Value: Program Management, Communication, Change Management and Value Realization

Source: Accenture

The Risk-Adjusted Operating Modeltypically begins with a high-levelstrategic assessment, designed togain an understanding of the client’ssituation. The key objective is toidentify attractive opportunities foradding value, which are then trackedand measured over the life of the

project. The assessment also seeks toleverage the company’s own expertiseand experience to evaluate existing

operations, risk capabilities, processesand systems. (Figure 3)

Working in tandem, the client andAccenture identify adjustment initiativesfor the existing operating model anda timeline for implementation. Thebusiness case is calculated, based on

client specifics including the complexityof the business, the maturity of existingrisk management capabilities, and

the client’s key financial metrics, toestimate potential costs and benefits.Other key considerations include areview of industry benchmarks and thelikelihood of quick “wins” in addition tomedium- or long-term initiatives withcorresponding benefits. Activities withinthis phase are supported by Accenture’s

ready-to-use assets for quick and cost-effective assessment.

Accenture’s Risk-Adjusted Operating Model Approach can help clients develop robust risk management capabilitiesthat are aligned with their target level of sophistication

Targeting and Delivering Value

Figure 2

The Accenture Risk-Adjusted Operating Model Approach

Gaining an understanding of the client’s situation and challenges helps identify high level opportunities for creatingvalue, which are then tracked and measured over the life of the project

Figure 3

Strategic assessment to identify opportunities for adding value

Target and

Deliver Value

High Level Strategic

Assessment

• High level diagnostic of current risk management capabilities(Maturity Assessment)

• Operating model adjustments identified and socialized

• Indicative industry benefit benchmarks

• Strategic assessment to define business case for diagnostic and to identifycompliance opportunities

• Metrics definition to track results

Source: Accenture




The next step in the development of the Risk-Adjusted Operating Model isan in-depth assessment of the client’smarket, business model and operatingmodel to identify areas for improvementand opportunities for value capture.Together the client and Accenture

benchmark and assess the existingrisk management function, processes,technology and data capabilities against

industry best practices, and also assesscurrent capabilities against regulatoryrequirements. We identify areas forimprovement in processes, policies,data, measurement and organization,formulating options for possiblesolutions and outlining both costs and

benefits with the help of transparentbusiness cases which are linked to theidentified areas of adjustment. (Figure 4)

Diagnosis, Exploration and Blueprint Development

Figure 4

In-depth assessment to identify areas of improvement for value capture

Performing an in-depth assessment of a client’s market, business and operating models help identify improvementareas and options for additional value capture

Diagnose

and Explore

Gap Analysis and

Closure Approach

• Benchmark risk management function

• Assess existing risk management processes, technology and datacapabilities against the industry best practices

• Adjustments to operating model defined and considering:

-Strategy

-Organizational design

-Process and technology architectures

-Sourcing strategy

Source: Accenture

Once options have been selected, theyare translated into concrete, detailedand actionable recommendations,including adjustments to the existingoperating model and processes, to allowexecution teams to implement them and

capture identified value. Some changesin the operating model and its specificprocesses might be supported byadjustments in IT capabilities to ensurecost efficiency. (Figure 5)

Blueprint

Translating high level options into concrete, detailed, and actionable recommendations at the capability level enableexecution teams to implement and capture value

Figure 5

Translating options into actionable recommendations

Blueprint

Solutions Design

• Design required organization adjustments (functions and processes)

• Software requirements identified and software selection conducted

• Implementation roadmap defined

• Business case for change developed

Source: Accenture




In collaboration with the client,Accenture works to implement changein ways that support value creationwhile maintaining momentum andorganizational alignment. (Figure 6)

Implementation of the Risk-Adjusted

Operating Model takes place on severallevels, including:

• Organization and governance:

Designing a logical, customizedoperating model and rolling out the newrisk policy and strategy

• Processes: Developing relevant

processes to enable change whileintegrating both risk processes and coreinsurance processes

• Technology architecture:

Consideration of implications to data

and IT systems (e.g. enhancement of existing core-insurance software, dataflows and reporting capabilities)

As part of the execution of the changeprogram, Accenture and the client teamestablish training initiatives, gatherfeedback from participants and makenecessary adjustments.

Execution

Figure 6

Implementing the model across levels

Working collaboratively with the client to implement the model change helps maintains value creation, momentum,and organizational alignment, while transferring skills and knowledge along the way

Execute

Implement changes

• Adjusted operating model implemented on following levels: Organization

and Governance, Processes and Technology Architecture

• Efficient and effective risk function supporting the business units

• Strong risk culture across the organization

Source: Accenture




Benefits from Risk-Adjusted

Operating Model

• Value Generation throughwide contribution and usage of risk management capabilities tosupport decision making and valuegenerating processes;

• Improved business decision-

making through alignment of overall

risk appetite and business strategy,helping increase the efficiency of capital utilization;

• Improved business results through integration of risk andcore insurance processes andalignment of processes and systems– with alignment helping to reduceduplication of effort and non-value added activities – and dataintegration providing the platformfor embedding risk withinthe business;

• Enhanced operational efficiency through an integrated and robust ITlandscape, with a comprehensive andcommon IT landscape for multiplefunctions reducing risk managementcosts and increasing operationalefficiency through improvedautomation and a consistent data

management and quality framework.

Design and implementation of the Risk Adjusted Operating Model can yield significantbenefits to insurers:




ConclusionRisk considerations should be integrated into all decisions regarding operations, capitalmanagement and management processes. Accenture’s Risk-Adjusted Operating Modelhelps companies manage their enterprise-wide risks and aligns the risk managementprogram with business and regulatory concerns.

By facilitating the achievement of strategic and operational objectives,this new model provides multipleapproaches to measure andmanage risks.

This approach is based uponAccenture’s extensive experiencein delivering comprehensive, end-to-end risk management projects.

Within these projects, Accenture hashelped clients from strategic conceptthrough project managementthrough development and integrationof IT applications. Accenture has the

assets and practices to help clientsobtain desired outcomes throughthe Risk-Adjusted Operating Model.



13-0073 / 11-5807

About AccentureManagement ConsultingAccenture is a leading provider of management consulting servicesworldwide. Drawing on the extensiveexperience of its 16,000 managementconsultants globally, AccentureManagement Consulting works with

companies and governments to achievehigh performance by combining broadand deep industry knowledge withfunctional capabilities to provideservices in Strategy, Analytics, CustomerRelationship Management, Finance andEnterprise Performance, Operations, RiskManagement, Sustainability, and Talentand Organization.

About Accenture Risk

ManagementAccenture Risk Management consultingservices work with clients to create andimplement integrated risk managementcapabilities designed to gain highereconomic returns, improve shareholdervalue and increase stakeholder confidence.

About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company, with approximately259,000 people serving clients inmore than 120 countries. Combiningunparalleled experience, comprehensivecapabilities across all industries andbusiness functions, and extensiveresearch on the world’s most successfulcompanies, Accenture collaborates withclients to help them become high-performance businesses and governments.The company generated net revenues of US$27.9 billion for the fiscal year

ended Aug. 31, 2012. Its home page iswww.accenture.com.

About the Authors

Eva Dewor

Eva Dewor is an executive director,responsible for Risk Management inGermany, Europe, Africa and LatinAmerica, Insurance area. Based in Munichand with over 16 years of consulting

experience, Eva Dewor specializes inhelping organizations enhance their riskmanagement capabilities through itsintegration in decision making, steeringand reporting. Working with risk executivesof multinationals from across the financialservices industries, Eva helps them becomehigh-performance businesses.

Markus Salchegger

Markus Salchegger is a senior director,responsible for Risk Management Insurance

in Austria, Germany and Switzerland.Markus Salchegger holds a PhD inMathematics, and over the past 15 years,he has used his extensive experience ininsurance, reinsurance, banking, assetmanagement and software developmentto analyze, design and deploy solutionsfor risk management and financial serviceapplications that help clients become high-performance businesses.

Daniel Kimmerle

Daniel is a manager -Risk Management,based in Munich. Daniel uses his extensiveexperience in risk management andcompliance to support insurers andreinsurers in analyzing, designing andimplementing their risk managementsolutions and helping them comply withregulatory requirements and becomehigh-performance businesses.

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accenture a new risk adjusted operating model for the insurance industry

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