Managing Successful Finance and Risk Transformations in the Insurance Industry

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THE INSURANCE INDUSTRY, MARKET CONTEXT AND ENVIRONMENT

A difficult business environment is impeding growth in the insurance industry. In addition to complying with regulatory demands, insurers have to transform their businesses to address multiple challenges. Pressures on profitability include fragile economic conditions, a low-yield environment, increased competition and new cost pressures arising from necessary consolidation in systems, technology and processes. In this environment of subdued growth and high uncertainty, additional strategic considerations include demographic shifts, evolving consumer demands and the rising cost of natural disasters and calamities.

The current historically low interest environment can also threaten insurers’ business model, as it becomes increasingly difficult to make contractually guaranteed payments with declining asset yields. This risk can increase considerably when funds are continuously invested at low rates, further diminishing insurers’ capital base and affecting their business resilience.

Insurance companies are also under pressure from their shareholders and stakeholders to generate returns on the significant investments made in the area of regulatory change, such as Solvency II. Accenture’s research—including interviews with chief risk officers and chief financial officers, as well as surveys such as the 2013 Accenture Global Risk Survey and the Accenture Risk Management: 2012 Risk Analytics Study—indicates that insurers will seek to generate additional value by risk management methods and by optimizing existing operating models.1 Based on these findings and our own experience, we believe insurers will need to define new operating models to generate value by aligning and integrating risk management methodologies and approaches in core insurance business processes.

From Strategy to an Effective Finance and Risk Transformation

1. Define a strategic approach to regulation and value add

2. Define the future shape of risk and finance

3. Drive business insights through analytics

SOLVENCY II AND IFRSWhile Solvency II focuses on capital adequacy for insurers, International Financial Reporting Standards (IFRS) principles consider the emergence of profit and the timing of its release.2 In considering profit, the amount of capital required is a key denominator but it is not the sole contributor to the equation.

A key challenge for insurers when adapting their processes to cope with IFRS principles will be how they deal with profit. Our expectation is that IFRS earnings will be more volatile. Will investors be prepared to accept this new volatility or will they expect an additional premium for this “new” risk? Similarly, will insurers have to change their financial reporting process and content to explain this volatility more explicitly? Earnings volatility also has implications for the financial planning and budget process, including the calculation of dividends and the setting of risk appetite.

Profitability is usually a key factor in most reward-based remuneration programs. If, as a result of IFRS, earnings are reported differently, insurers may need to consider how to address this in their payroll/bonus allocation process.

THE CHANGING RISK ENVIRONMENTThe risk profile of the insurance industry has significantly changed in recent years. This is attributable to deteriorating credit markets, increased volatility in equity markets, investment losses, higher geopolitical unrest, and more severe and accumulative consequences of natural catastrophes. Other contributing factors include globalization and highly optimized industry process chains.

The observed increase in correlation and interdependency within the sector have contributed to a greater acknowledgment of risk management as a key business driver and differentiator. As its influence on earnings and balance sheet strength is recognized, we see risk management undergoing heightened regulatory scrutiny and a reassessment of rating models by credit agencies, with agencies now looking at the quality of an enterprise’s risk management.3

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OPERATING IN A CHANGING REGULATORY ENVIRONMENT

Solvency II has so far dominated the regulatory agenda of insurers, and the implementation timeframe has been further defined by the Omnibus II Directive. As of 2016, insurers need to have established effective governance and risk management systems and the capabilities to comply with new reporting requirements. Through adequate levels of capital and consistent risk management standards, a higher level of protection will be required.3

The Solvency II Directive is based on three pillars:3

Pillar 1 principally sets out the quantitative requirements. It establishes the framework for the calculation of technical provisions, as well as the Solvency Capital Requirement (SCR) by using either the Standard Formula, a Partial Internal Model or the Internal Model developed by the insurance company. It includes guidelines for the valuation of assets and liabilities, as well as capital requirements in order to ensure that companies hold sufficient capital. Furthermore, insurers are requested to calculate Minimum Capital Requirements (MCR), where the MCR can be interpreted as a capital level at which the regulator would effectively intervene.

Pillar 2 covers qualitative requirements for governance and risk management as well as a framework for the effective supervision of insurance companies. These include, among others, directives that insurers operate a number of key functions, including compliance, actuarial, internal audit and risk management, and that they implement an effective risk management system.

Pillar 3 covers the enhanced reporting and disclosure requirements for insurers, both towards supervisory bodies as well as towards the public. Insurers will be required to regularly publish a Solvency and Financial Condition Report (SFCR) as well as a Regular Supervisory Report (RSR), which contain qualitative information, in addition to quantitative information via quantitative reporting templates (QRT).

In addition to Pillars 1, 2, and 3, further changes to the timeline as well as agenda should not be ruled out.

IFRS 4 PHASE II: ACCOUNTING OF INSURANCE CONTRACTSThe final Exposure Draft for IFRS 4 Phase II is expected in the first half of 2015 with the likely effective date of January 1, 2018. It aims to improve comparability in the accounting of insurance contracts.4

Calculating the Contractual Service Margin and projecting fulfillment cash flows as well as the mirroring approach are the three areas of major impact in IFRS 4 Phase II.

The Contractual Service Margin represents the risk-adjusted (present value of) expected profit from insurance contracts.

The fulfilment cash flows consist of the expected cash flows (premiums, claims and benefits), the risk adjustment which allows for the uncertainty of future cash flows, and the discounting.

The mirroring approach under IFRS 4 Phase II currently requires the investment component of an insurance contract to be calculated separately for disclosure requirements.

IFRS 9: FINANCIAL INSTRUMENTSIFRS 9 aims to establish new principles for the accounting of financial assets and liabilities and will replace the former International Accounting Standard (IAS) 39 entirely.5 The standard addresses the following issues:

Classification and Measurement of Financial Instruments

IFRS 9 reduces the number of measurement categories to two:

1) Amortized costs

2) Fair value (either through profit and loss or through other comprehensive income)

Impairment of Financial Assets

Under the new standard, credit losses will be recognized on an expected loss basis rather than an incurred loss basis which then highlights the probability of future defaults.

Hedge Accounting

IFRS 9 simplifies hedge accounting as it builds on existing practices. Hedge accounting requirements allow entities to match gains or losses on financial hedging instruments with losses or gains on the risk exposures they hedge, if certain requirements concerning the hedging relationship are met. The underlying model is not designed to accommodate hedging of open, dynamic portfolios.

The International Accounting Standards Board (IASB) has tentatively decided to set January 1, 2018 as the effective date for the mandatory application of IFRS 9.

SIMILARITIES AND DIFFERENCES OF SOLVENCY II AND IFRS 4 PHASE IIWhile Solvency II aims to introduce a common framework to ensure that insurers have an adequate level of capital resources to meet their policyholder obligations (and to justify their target solvency margin), IFRS 4 Phase II aims to introduce a common set of accounting guidelines to increase transparency and facilitate comparability of insurers’ balance sheets and earnings.4 Both regimes require reporting at a group as well as an individual level.

Solvency II and IFRS 4 Phase II apply the concepts of time value for money and future cash flows.

Solvency II does not differentiate between participating investment and insurance contracts.

The contractual service margin under IFRS 4 Phase II reflects the emergence of profit over the life of an insurance contract. This concept does not exist under Solvency II. (It is a reflection of the timing and placement of the profit release per ‘fulfillment cash flow’, see Figure 1.)

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Figure 1. Top line Comparison of Solvency II and IFRS from an Accounting Perspective

FUTURE REGULATORY DEVELOPMENTSInsurers also face the challenge of changing and uncertain regulatory requirements. Some legislative programs such as Solvency II are continuously updated; while new ones are added, such as new requirements issued by the International Association of Insurance Supervisors (with further specifications coming) applying to Global Systemically Important Insurers. Regulatory requirements change over time and their dependencies (and potential synergies) provide additional impetus for insurers to focus on end-to-end transformation processes in order to help create an organization which can quickly, effectively, and efficiently respond to future additions or modifications to the regulatory environment.

DATA AND TECHNOLOGYTo create a flexible, responsive organization, insurers should consider evolving their business model to keep pace with changing customer expectations and competitive innovations. To this end, insurers are encouraged to enhance their understanding of their customers by harnessing all available information, and then managing the customers—and their expectations—across the value chain to help optimize each customer’s overall value to the organization. We have also observed that insurers across the globe are discovering the potential of data-driven decision making, and are making significant investments in developing advanced data and analytics capabilities—often with great success.

In our view this will have a major impact on the insurance industry, with the digital revolution fueling four key drivers of change: (1) customer behavior, (2) new profit pools, (3) technology innovation and new digital competition and (4) pressure for profitability.

Two Accenture studies “The Digital Insurer - Accenture 2013 Consumer-Driven Innovation Survey” and “Energizing Global Growth - Understanding the Changing Consumer” report that insurance customers have changed in many important ways.

Two examples show the impact on data and technology:

• 78% of surveyed insurance policyholders across 11 countries are willing to provide more personal information in exchange for better, more personalized insurance products6

• 71% of survey respondents would be interested in buying at least one of the surveyed products online7

Growing data volumes (“Big Data”) and an increasing complexity of both structured and unstructured data from internal and external sources make analytics more challenging to undertake, but also underline its importance. While innovations responding to changing customer behavior can mostly be found in core insurance businesses, the finance and risk architecture (e.g. data integration, data storage, risk/finance integration layers) is affected, as well. Extended product development, more complex underwriting, new risks and other factors also mean that much broader (and more granular) data sources have to be included in the regular finance and risk closing cycles. This entails processing and reporting more financial and risk data at usually strict deadlines, calling for management discipline and a system architecture and data management structure that can help ensure correctness, completeness, and timeliness.3

Solvency Capital Requirement

Solvency II

Replicating Portfolio

Risk Margin

Technical Provisions

Discounted Estimate of Future Cash Flows

Contractual Service Margin

IFRS 4 Insurance Contracts IFRS 9 Investment Contracts

Replicating Portfolio

Fair Value or Amortized Cost

Risk Adjustment

Contract Liabilities

Discounted Estimate of Fulfillment Cash Flows

Source: Accenture, October 2014

Contractual Service Margin

Risk Adjustment

Discount Rate

Presentation/Disaggregation

Reinsurance

Transition

Disclosure

Build

ing

Bloc

ks

Future Cash Flows

Premium Allocation Approach

Solvency II

Financial Instruments and other Accounting Changes

Definition and Scope

Separation

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C-LEVEL CHALLENGES AND PERSPECTIVES AROUND KEY INFLUENCING FACTORS

As seen in Figure 2, the new and changing regulatory requirements pose problems for all C-level executives and require strong collaboration.Implications for Insurers

While the different corporate functions stayed within their silos in the past, a strategic approach leading to a risk and finance function that adds value requires, as seen in Figure 3, greater collaboration across all operating model components and an integrated assessment of both existing and missing (but needed) capabilities.

ORGANIZATIONOur experience with insurance clients indicates that the industry faces an era of change in the role of ERM, finance, accounting, actuarial and controllership. We also see a shift in the traditional role of risk management, moving towards a more actuarial and regulatory-driven discipline, ensuring regulatory compliance within a strategy-driven ERM function focused on maximizing enterprise value.

Applying the existing regulatory governance structure and integrating new functions such as actuarial and compliance while connecting to traditional finance and accounting departments is not an easy task. Traditionally, as a result of siloed structures, assets and liabilities in most companies have generally been looked at separately, often by different departments and segments. As new regulations call for more interaction between the involved parties and business segments, detailed and sustainable planning of the adoption process and timeline is of utmost importance. It may also be necessary to create a balanced fit, with a proper assessment to find the optimal mix of people and skills.

Insurers should also consider improving their existing delivery models to help address current economic conditions. Flexibility and cost-effectiveness can be achieved through more centralized solutions including near- and offshore solutions and centralization of competencies. To achieve economies of scale and help drive down operating costs, best-of-breed managed services solutions with strong analytic models may also be considered if they: a) conform to the firm’s overall strategy and b) help drive down costs.

From our perspective, insurers, based on their individual operating model design, should implement a more integrated finance and risk operating model which can support value generation from a risk-adjusted perspective.

PROCESSESNew regulatory standards require integrating and aligning risk processes with core insurance processes in order to enhance the value of information generated by Solvency II and ERM.3 To comply with new regulatory requirements and meet deadlines, reporting requires harmonization, standardization and automation of closing processes for local Generally Accepted Accounting Principles (GAAP) and IFRS as well as for Solvency II.

Closer interactions among asset management, finance, accounting, risk and actuarial departments is in our view necessary to avoid duplication and redundancy and improve efficiency. We also encourage insurers to align their risk strategy, business strategy and steering methodology to support coordinated, innovative underwriting and investment decisions.

Effective collaboration between departments and a closer alignment with international offices or business units is required to deliver consistent data on time.3 This may entail the redesign of communication processes to improve internal transparency for strategic enforcement. This, in turn, can lead to the creation of an integrated risk and finance process model, which ensures efficient regulatory compliance but also generates value beyond pure compliance.

TECHNOLOGYThe emergence of new regulatory standards and the ongoing transformation of the insurance industry are affecting finance and risk architectures. We suggest insurers consider upgrading their actuarial and risk systems for the new valuation and risk models, while accounting and reporting systems should be prepared to manage increased data volume and new reporting formats that comply with the extended reporting requirements and deadlines. This can be achieved by implementing new technologies with a higher degree of standardization and automation while providing support for the increasing interaction between the various business departments. For insurers this can mean focusing on a stronger and more centralized finance and risk architecture; meaningful integration of finance and risk management systems; and the consolidation and modernization of legacy systems.

If the right methods for extracting, transforming and loading data are implemented, central data warehouse solutions can help insurers establish a “single point of truth” for finance and risk data. This central data pool, serving actuarial and risk functions as well as accounting, finance and reporting systems, can be the first step in harmonizing the system landscape to create an integrated platform that supports all reporting standards and principles.

Insurers should also consider collecting and aggregating requirements across the different business departments and incorporating them in a holistic risk and finance architecture as the basis for an overall IT strategy. Insurers should also give consideration to developing tactical solutions, taking a long term perspective, avoiding over-investing in interim solutions that might solve imminent problems, but lack more sophisticated and comprehensive functionalities.

In general, insurers are encouraged to avoid redundancy and leverage synergies wherever feasible. This also applies to the areas of finance, accounting, risk management actuarial processes and systems, where similar and partially interdependent processes (e.g. Contractual Service Margin under IFRS 4 Phase II)8 might lead to duplication of capabilities.

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Figure 2. Key Challenges for Corporate Executives as a Result of an Evolving Regulatory Environment

Figure 3. An Operating Model for Generating Greater Value from Risk and Finance Functions

Chief Financial Officer (CFO)

Chief Risk Officer/ Chief Actuary (CRO/CA)

Chief Information Officer (CIO)

Chief Operating Officer (COO)

Para

llel I

mpl

emen

tatio

n of

Sol

venc

y II

(201

6) a

nd IF

RS (2

018) - High workload in

finance and accounting departments through implementation of new accounting standards and increased reporting frequency

- Traditional low level of collaboration between involved departments (e.g. finance and risk)

- Impact assessment on investment and insurance products

- Enhancement of governance structures

- Management of capitalization and contingency planning

- Design and implementation of an internal/standard model including regulatory approval

- New supervisory reporting requirements

- Organizational integration of risk management with other core disciplines (e.g. strategy, finance, capital management)

- New requirements for actuarial, reporting feeder and data management systems

- Flexibility of accounting and reporting systems

- Integration and standardization of data architecture

- Integration of digital innovations, technology trends and long-term solutions into IT strategy

- Inadequate data granularity

- Unclear responsibilities lead to redundancies

- Time pressures, especially on accounting and actuarial departments

- Process alignment and integration

- Adjustment of governance processes

- Optimal mix of talent

- Training requirements

Ente

rpris

e Ri

sk M

anag

emen

t (ER

M)

- Consideration of all regulations relating to capital market trading

- Management of capital and liquidity in the context of Solvency II

- Re-design and enhance speed of reporting solutions under consideration of regulatory and risk management requirements

- Effective stakeholder management in relation to risk capabilities (e.g. rating agencies)

- Development of firm wide risk culture, commonly used risk taxonomy, standards and processes

- Enhancement of risk assessment methods

- Integration with strategy and planning

- Data aggregation and advanced analytics and capabilities

- Integration and consolidation of siloed risk architecture

- Security and technology issues

- Customization for end-to-end lineage

- Consistent data management framework

- Implementation of adequate risk response procedures

- Business interruption

- Role of ERM within organization and ERM ownership

- Effective talent management

Mar

ket e

nviro

nmen

t and

cos

t pre

ssur

e

- Options and guarantees vs. declining asset yields

- Reconsideration of capital allocation

- Duration mismatch

- Alternative investments

- Impact of declining yields on capital base

- Extra volatility through use of mark-to-market

- Enhanced monitoring of investment portfolio

- Adoption of new risk capabilities (e.g. actuarial functions and models)

- Extension of insurance systems for new product types and policies

- Adoption of digital innovations (e.g. big data, analytics)

- Lack of linkage between processes causes a silo perspective

- Necessity for redesign of processes

Organization Processes Technology Data

• Governance structure

• Actuarial, compliance, risk function

• Accounting function

• Audit and internal revision/Internal controls

• New reporting functions

• Communication processes

• Modeling and calculation processes

• Closing processes

• Alignment and integration of new processes

• Avoid duplication and improve efficiency

• Standardization, automation

• Risk architecture

• Digital and analytics solutions

• Accounting systems

• Actuarial systems

• Integration of new reporting systems

• Data management framework

• Data governance

• Master and meta-data management

• Shared metrics

• Data quality, availability and consistency

• Data security

Source: Accenture analysis and assembled based upon publicly available Solvency II and IFRS data, October 2014

Source: Accenture, October 2014

Almost all business related transaction and master data is input for subsequent calculation and processing activities. While there is increasing awareness of the value that can be generated from this data, the information is often spread across an insurer’s various feeder systems—such as investment, policy administration, and claims—pointing to a fragmented system landscape with inflexible and complex legacy systems. While source systems usually consist of a mix of standard and proprietary software solutions, new developments or enhancements can often be difficult to realize. New requirements (both internal and regulatory) related to granularity, quality or availability of the data, as well as operational efficiency and analytics capabilities, can compel insurers to consolidate and modernize their legacy systems.

DATAMany challenges in data management arise from the poor quality of existing data practices, but data requirements from new regulations are another key factor. Both Solvency II and IFRS 4 reporting need a data foundation combining core insurance, investment and market data, as well as actuarial and accounting data.3 Not only do these different types of data have to be available, but insurers must also ensure sufficient data quality in terms of completeness, accuracy, timeliness, and appropriateness.

Data quality management we believe has to be a priority to help ensure regulatory compliance. Quick and thorough responses to auditors, regulators and other stakeholders are in our view as important as data security and protection to mitigating the risk of reputational damage. But an increase in data quality can also help unlock value and reduce costs by:

• Reducing resources needed for data monitoring and data cleansing;

• Improving accuracy of estimates of solvency capital;

• Extending business operations through the reduction of regulatory capital; and

• Improving steering to meet strategic and economic goals according to clearly defined performance indicators.

Within traditional risk management data, data quality management was not one of the core disciplines. In practice, however, we feel the integrity, accuracy and consistency of data are key drivers for understanding business risks. Insurers must understand the pitfalls in the data life cycle and define project approaches to address the increased importance of data quality management.

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C-LEVEL TASKS AND PERSPECTIVES AROUND KEY INFLUENCING FACTORS

Figure 4. Responding to the Challenges of an Evolving Regulatory Environment

Chief Financial Officer (CFO)

Chief Risk Officer/ Chief Actuary (CRO/CA)

Chief Information Officer (CIO)

Chief Operating Officer (COO)

Org

aniz

atio

n an

d G

over

nanc

e

Adapt existing governance structure to ensure adequate level of collaboration with risk in a risk finance operating model

Integration of siloed, fragmented risk architecture(s) and utilization of digital and analytics solutions (e.g. big data, analytics)

Level of integration and alignment of ERM in existing governance structure to enable value generation

Adapt and enhance regulatory driven roles and responsibilities to support value maximizing activities

Integration of siloed, fragmented risk architecture(s) and utilization of digital and analytics solutions (e.g. big data, analytics)

Assess availability and implement audit trail

Integration of siloed, fragmented risk architecture(s) and utilization of digital and analytics solutions (e.g. big data, analytics)

Increase analytics capabilities and skills

Proc

esse

s

Speed up accounting and reporting processes

Harmonize, standardize and automate reporting and closing processes (e.g. local GAAP, IFRS, Solvency II) to comply with new amount of regulatory reports and given deadlines

Integrate and align risk processes with (core) business processes in order to enhance value of information

Harmonization of risk and reporting processes

Enable a high degree of standardization and automation to support improved quality and strong increase in number of created reports, analytics capabilities and big data amounts

Leverage regulatory driven process insights (e.g. process landscapes and maps) to avoid duplication and redundancy and improve efficiency

Ensure increased process flexibility/adaptability

Make use of flexible sourcing concepts and process bundling (shared services centers/center of excellence, etc.)

Data

and

Tec

hnol

ogy

Prudent handling of increased financial accounting and reporting requirements

Verify re-use capabilities of existing risk data and technology for IFRS 4 accounting

Verify that technology and data are adequate and sufficient for compliance with Solvency II

Leverage the high volume of data collected and prepared for Solvency II compliance (e.g. support sound decision making and actual management of risk)

Effectively support business units in their increased usage of technology and data

Validate new technologies (e.g. SAP HANA®, cloud computing, digitalization) and strive for modernization of legacy systems

Different departments (finance, risk, actuarial, policy/claims) need to share, process, and consolidate data efficiently

Increased level of data granularity

Source: Accenture analysis and assembled based upon publicly available Solvency II and IFRS data, October 2014

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ADDRESSING ISSUES ARISING FROM A CHANGING ENVIRONMENT

RISK-ADJUSTED OPERATING MODELAs outlined in the previous sections, insurance operating models should be able to address multiple issues related to regulation, market and industry concerns. For insurers, this means adapting target operating models—based on the company’s own level of aspiration—to address these issues.

A key element in such a transformation is building upon regulatory investments made over the last few years in the area of risk management, with the goal of turning compliance capabilities into a competitive advantage. Incorporating risk into the operating model design requires a synergetic view of the operating model’s components—including organization, processes, data and technology—to identify interdependencies and to ensure the transformation to a risk-adjusted operating model (RAOM) is done at all levels of the business.

Accenture has developed a structured and flexible approach, called the Accenture RAOM Framework, to support our client’s operating model transformation agendas while incorporating and integrating the element of risk.

The RAOM Framework helps ensure a step-by-step transformation at multiple levels:

• Close collaboration between departments, functional areas and/or capabilities is a major prerequisite for building a RAOM Framework. The major areas of collaboration are strategy, risk, capital, finance, and performance management. The structured alignment of these areas provides the basis for additional value generation.

• It is suggested that the transformation to a RAOM Framework be executed within all operating model components to help improve business results and value generation. This would involve implementing the following tasks:

- Aligning and integrating existing governance components, while establishing new structures as well as adjusting existing roles and responsibilities;

- Aligning and integrating risk processes with core business processes as well as designing and implementing new processes;

- Within technology, consolidating and integrating technical architecture components and tools as well as implementing new solutions to build an integrated, holistic risk finance solution; and

- Establishing a consistent data management framework to help ensure availability, consistency and quality of data, as well as

Key Building Blocks of the Accenture Risk-Adjusted Operating Model Framework

developing clear data governance structures for effective management and usage of data.

• Another key transformation component is the implementation of a centralized capital optimization and steering approach covering all phases, from planning, to evaluation and monitoring, to execution. This can help encourage closer operational interaction between the involved business areas.

Within Accenture’s RAOM Framework approach we have defined three essential implementation initiatives: Risk-Adjusted Strategic Planning (RASP), Risk-Based Capital Optimization (RBCO) and Risk- Adjusted Performance Management (RAPM) which focus on different elements of the RAOM transformation and offer clients the flexibility to implement a RAOM Framework based on their individual as-is situation and aspiration level.

Strategy

Exec

ute Evaluate

Plan

Monitor

Orga

nizatio

n Processes

DataTechnol

ogy

Risk-Adjusted Operating Model

Financial Management

Capital Management

Perf

orm

ance

Man

agem

ent

Risk Managem

ent

Source: Accenture, October 2014

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Figure 5. Accenture Finance and Risk Reference Architecture

DATA AND TECHNOLOGY: MAKING USE OF CAPABILITIES, TOOLS AND SOFTWARE PACKAGESInsurers, either while planning or during the course of implementation projects for Solvency II and IFRS 4, often face two major problems related to data and technology. The first is the existence of multiple data models and even more interconnected data references caused by the duplication of data sources and resulting in the duplication of manual reconciliation efforts. The second is a heterogeneous and non-scalable IT architecture. From our work in this space, the lack of a well-integrated finance and risk architecture can lead to process complexity, delays in data and report provision and inefficiencies along the entire reporting process chain: from data sourcing, calculations, postings and reporting to the regulatory supervisor.

These issues need to be addressed to make sure that Solvency II and IFRS 4 requirements are not perceived as a regulatory burden, but as an opportunity to create a forward-looking finance and risk architecture that helps ensure compliance and create value.

Accenture Finance and Risk Reference Architecture

The development of future-oriented finance and risk architectures within the context of group and local finance and risk capabilities, requires in our view sound analysis and design to avoid duplications/redundancies and the implementation of potential obsolete functionalities within the overall system architecture. The Accenture Finance and Risk Reference Architecture provides a software-agnostic framework to identify potential gaps and overlaps and to offer concrete architectural options to support operating models’ architecture design, as previously discussed.

Accenture Finance Transformation Solution (AFTS)

The Accenture Finance Transformation Solution is a comprehensive technical solution that encompasses accounting, sub-ledgers, reporting and control systems designed for insurance, reinsurance and banking. It incorporates a full set of deliverables for all phases including business requirements, general and detailed designs, test documents, preparation for go-live, project management and change management. AFTS is based on our extensive library of financial process best practices including closing processes, descriptions of leading practices and overviews of information technology blueprints.

The platform is fully packaged for the financial services industry and is localized for different country environments. Components can be activated as required to address client needs, reducing the risks, implementation time and total cost of ownership of an integrated finance and accounting system.

Developed on the SAP HANA® platform, the Accenture Finance Transformation Solution supports efficient implementation of financial reporting capabilities and facilitates the creation of a consistent data model for accounting and consolidation of financial results. By providing pre-configured technical solutions for re-use, the solution can help reduce the number of days required for configuration and integration by 20 to 30 percent.9 SAP HANA® also facilitates the solution’s support of comprehensive application and database services.

SAP HANA®

SAP HANA® is more than a technological innovation; it has the potential to revolutionize the way businesses are run. SAP HANA® started as a way to achieve faster analytics with in-memory computing. It is now a driving force in enabling the real time enterprise. Organizations are taking different routes to implementation and generating business value from SAP HANA®. These routes range from the tactical, such as addressing a single business process in order to understand SAP HANA®’s potential at relatively low risk, to a full-scale transformation of end-to-end ERP systems on the SAP HANA® platform.

There is more data from more sources than ever before. The ability to help capture operational data as it is generated, and to incorporate analytical data from elsewhere in the organization represents a huge leap forward for companies who need to spot trends, react quickly, and boost their competitive advantage.

The Accenture HANA Business Applications (HBA) offering brings together Accenture’s assets—implemented on SAP HANA® technology—to address a specific business challenge. Packaged as a complete solution, including hardware, software and services, HBA can be delivered on-premise or as a cloud-based solution. HBA offers a solution to a specific business need, with each solution created for a specific industry.

SAP® Simple Finance

One of the new architectures based on SAP HANA® is SAP® Simple Finance, a solution for finance and controlling with the objective of improving the harmonization of internal and external reporting, and to do so in a smarter, faster, and simpler way:

• Smarter by processing data from a single point of truth for financial data based on SAP HANA® and providing much higher flexibility in reporting;

• Faster through enabling real-time access to financial data and, thereby, allowing accelerated data analysis and business decisions; and

Source/Feeder Systems

Analytics and Reporting

Finance/Financial Data

Risk and Finance Data Storage

Data Flow Control and Integration

External data

Accounting Consolidation Others

Risk/Actuarial Data

Other actuarial data

Qualitative/Governance and controls

Quantitative risk management

Controls ETL

Asset management

Other

Contract/Product management

Prudential reports

Financial reports

Client reports

Management reports

Data Requirement

Operation Reconciliation

Risk and Finance Data Management/Data Governance/Master Data Management

Fina

ncia

l and

Risk

Rec

onci

liatio

nM

ulti-

GAAP

Rec

onci

liatio

n

Modification of Methodologies

Data Quality and Governance Mapping and Interfaces Reporting and Reconciliation

Posting Logic and Chart of Accounts Storing Capability

Note: GAAP stands for Generally Accepted Accounting Principles. ETL stands for Extract-Transform-LoadSource: Accenture, RiskMinds Insurance 2014 presentation, March 2014

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Figure 6. SAP® Insurance Analyzer

• Simpler by using a simplified data model that reduces reconciliation effort and, hence, operating costs.

The result is not just better and efficient daily financial management, but also an improved financial planning and execution function that can help insurers keep up with rapidly changing market conditions. SAP® Simple Finance provides a comprehensive approach to demonstrate the latest technology for client evaluation and feasibility assessment supplemented by Accenture’s existing Finance Transformation Solution Platform based on SAP®.

SAP® Insurance Analyzer

The SAP® Insurance Analyzer is a specific solution integrated in the AFTS. This new SAP® solution supports the integration of finance and risk systems with pre-defined business content to record, transform and post data. As seen in Figure 6 below, the SAP® Insurance Analyzer also provides a centralized technical sub-ledger that consists of two modules: “Accounting for Insurance Contracts” (IFRS 4) and “Solvency Management for Insurance” (Solvency II). The layered structure of the SAP® Insurance Analyzer ensures that data is collected from source systems (such as core insurance, assets, and market data), transformed based on pre-defined business and calculation rules, stored as result data, and passed to the general ledger and consolidation. The AFTS will be enhanced with the SAP® Insurance Analyzer to create a new and unique integrated Finance and Risk SAP® packaged solution for the insurance market.

(Self-Service) Business Intelligence and Analytics

A key step in coping with the increasing reporting requirements and the business need for greater insight into the available data (along with the challenge of including new data sources and unstructured data in the analysis process) is the enhancement of business intelligence (BI) and analytics capabilities.

One way to obtain both a single point of truth and the required flexibility for the functional users and/or business units when operating on the data (such as data selection, calculations, simulations, report composition, data analysis, and forecasts) is through migration to a Self-Service BI. Using the BI-Software tool through respective technical functions, data architectures and organizational conditions allow for a higher degree of freedom and flexibility (for example, for customized ad-hoc reports and dashboards, or adjustments to the data model) to business users such as the risk or actuarial department. The technical prerequisite for such independent reporting processes is one central semantic layer, which hides the number of data sources connected to the BI solutions and the complex data models. By presenting the end-user a library of available data objects, the Self-Service BI provides considerably simpler access to different data sources across the organization.

Accenture’s BI and Analytics end-to-end services, range from strategic planning and BI roadmaps, to complex BI system development and technology upgrades, to application management. These services help clients move towards a central BI solution and achieve the desired level of analytical sophistication. By bringing together an understanding of the business and technology implications of an insurance organization to transform structured and unstructured data into meaningful and useful information, Accenture offers support for information strategy, data warehousing, data mining and information analytics.

SAP Accounting for Insurance Contracts

SAP Solvency Management for Insurance

Analytical Layer

Results Data Layer (RDL)

Process and Method Layer

Source Data Layer (SDL)

SAP® Insurance Analyzer

Source: Accenture interpretation based upon SAP® Insurance Analyzer information available on SAP® portal. Access at: http://help.sap.com/insurance-fsia

• Provides analytical functionalities which use and refine data from the Source Data Layer and Results Data Layer

• For example, GL connector, which supports postings in General Ledger system

• Contains financial and risk data from analytical calculations performed within the IA or from external applications

• The 'integration cornerstone' of the IA

• Contains all required processes and methods to perform the accounting for insurance contracts and solvency management

• Collects all data required for analytical purposes (from source system) and provide a semantically and technically integrated view of operational data

Insurance Core Systems

ETL Layer

Statutory and Regulatory Reporting

Accounting and Closing

Multi-GAAP Insurance Contract Accounting

Solvency II Standard Model

Insurance Analyzer (IA)Actuarial

Policies Liabilities Assets Reinsurance

14

DATAData management (including data governance and data quality management) is at the heart of the upcoming regulatory changes. The Solvency II regulation highlights the importance of data management and sets out numerous requirements for appropriate data quality (including accuracy, appropriateness, and completeness) and data governance, leaving the challenge for insurers to extend data availability to proper management of data quality.

By taking a more holistic view of data management, insurers can gain important insights that, in turn, can help identify different opportunities to generate value and reduce operating costs, such as:

• Improving data quality and access controls

- Standardizing industry data models to reduce data redundancy and establish common business terms

- Integrating the meta-data framework to address the diverse data requirements

- Rationalizing the data warehouse environment and establishing “one fact in one place”

• Reducing complexity

- Reducing data marts and data redundancy across the information value chain

- Rationalizing the BI and analytic technology footprint

- Simplifying the extraction, transform and load (ETL) environment, including “data movement services”

- Standardizing analytic, reporting, and ETL tools

• Reducing operating costs

- Replacing existing higher cost resources with lower cost resources

- Reducing platform processing costs

- Leveraging global sourcing options

- Standardizing environments to reduce ongoing maintenance costs

• Enhancing analytics capabilities

- Improving analytic/predictive modeling capabilities

- Improving quantitative throughput via implementation of model management and simplified data environments

- Introducing improved sampling and scoring techniques

- Enabling in-database analytics to accelerate analytic time-to-value

In order to connect regulatory and statutory compliance with realization of these opportunities, a cross-company (enterprise-wide) data management system should be considered by insurers as a top priority. We suggest insurers manage their data using a defined business value driven strategy throughout its lifecycle—from creation to retirement—and guided by the Accenture Enterprise Data Management Framework (Figure 7).

This framework is based on a simple end-to-end principle: The information management value chain starts with good data design and conversion, which have data management and governance as their foundation. Business intelligence and analytics then leverage trusted information and provide the understanding (insights) which helps the company improve its decision making (actions).

Effective data management is the foundation for decision making processes in an enterprise—and the framework offers the key components, including:

Data Strategy: Development of the vision, scope, business case and roadmap for transforming the managing of data to meet the business and technical needs of an organization.

Data Governance: Governance includes the rules, policies, procedures, roles and responsibilities that guide overall management of an enterprise’s data. It provides the guidance to help ensure data is accurate, consistent, complete, available, and secure. Governance also includes data ownership, data stewardship, data policies and data standards.

Master Data Management (MDM) and Meta-data Management: Master data represents the business objects which are agreed on and shared across the enterprise. MDM is the management of these shared business objects, while meta-data management is concerned with data structure, or data about data. Complex data models in insurance require application of dedicated approaches and best practices for MDM and meta-data management.

Figure 7. Accenture Enterprise Data Management Framework

Dat

a R

etirem

ent Data Creation

Enterprise DataManagement

Data Movement

Data Usage

Data Strategy

Data Sustainment

Data Governance

Source: Accenture Information Management Services, Business Intelligence, Playbook, April 2010

(Information management o�ce, data as a service, …)

Data organization

Data policies/ Procedures

Data standards

Data profiling

Data cleansing

Master data management

Data monitoring /Compliance

Data integration

Meta-data management

Data modeling/ Taxonomy

Data storage/ Access

Data retention/Archiving

Data classification

Data privacy/ Masking

Data Management Data Quality Data Conversion Data Architecture Data Security

Dat

a St

orag

e

15

Data Quality: Data quality reflects the ability of data to satisfy the stated business, system, and technical requirements of an organization. Data quality is typically measured in terms of completeness, timeliness, accuracy, consistency, relevance, and integrity. It includes capabilities such as data profiling, data cleansing, data monitoring, data compliance and data traceability.

Data Conversion: Encompassing the mapping, preparing, cleansing, transforming and loading of data into a new target data structure. Data integration, the key element of data conversion, is the articulation of how data should consistently flow between systems and the establishment of manual and automated procedures to support the on-going exchange of data.

Data Architecture: Data architecture depicts the way data is organized in a specific enterprise. The data within the structure is available for multiple levels of the enterprise, ranging from data around corporate models to individual system levels. In the context of a finance and risk transformation, it is key to manage the relevant data structures at multiple levels (e.g. group-level, business unit-level, department-level, etc.) under a well-designed data governance approach.

Data Security: This consists of the processes and technology designed to protect data from unauthorized access, viewing, modification or deletion whether the intent is accidental, intentional, or malicious. Data security initiatives, including data privacy and data retention, should be undertaken in concert with enterprise-wide security efforts including physical security, network security and technology security.

Data Sustainment: This is the continuing effort to drive, develop, and enhance value from data capabilities.

CENTRALIZATION AND SOURCINGThe variety of regulatory, business and technical requirements, along with continuing pressure on profitability, lead to increased emphasis on efficiency and cost optimization in the insurance industry. The business environment is becoming ever more global and barriers to technical collaboration are vanishing. We are seeing a clear trend towards increased centralization of operating model support environments, greater process and cost flexibility in conjunction with exploitation of geographic sourcing arbitrage, and improved allocation of talent.

Insurers are reshaping finance and risk operating models by using approaches which include:

• Shared services centers for finance and risk operations

• Centers of excellence for finance, risk, actuarial and analytics services

• Virtually centralized finance and risk operations

Different sourcing options include full insourcing, full outsourcing and hybrid sourcing.

Insurers are increasingly outsourcing application management, application development and parts of their finance and risk processes. Many leading insurers have already set up near-shore or off-shore support units, either in a ‘captive mode’ or together with a partner (such as Accenture) for operations and outsourcing.

Moving into such new modes of operations requires thorough planning and consideration of dedicated transition approaches to ensure smooth handovers, knowledge transfer, clear definition of service and operating level agreements (both internal and external) and ongoing monitoring of service quality.

Any centralization and sourcing approach, however, should clearly reflect the insurer’s overall business and operating model strategy—as well as its interest in reducing the total cost of ownership—balanced against the insurer’s culture, capability and readiness to move in this direction.

BUSINESS CASE DEVELOPMENT AND BENEFIT DRIVERSIn our view, proposals for optimizing the finance, risk and actuarial functions’ support structures should be clearly underpinned with a sound business case, total cost of ownership (TCO) tracking mechanisms and cultural considerations. There are usually standard savings and cost levers to be assessed, including personnel, facilities, hardware and software.

Key benefits are often found in increased reliability (through improved and centrally managed services with increased transparency), increased compliance (from better security, control mechanisms, and policies supporting bundled process clusters), improved business value (via better collaboration, common platforms, consistent service quality levels and digital enablement), improved finance and risk IT operating capabilities (including end-to-end service delivery capabilities and leveraging specialists) and increased cost efficiencies (in areas such as synergies, decommissioning, and investment allocation, among others).

16

17

Figure 9. Considerations in Transforming a Finance or Risk Operating Model

Example: Central Actuarial Service Unit for a European Insurance Group

Accenture helped a European insurance company to design and build the risk architecture now in use at a centralized actuarial service unit intended for the company’s business units located in Europe. The actuarial processes used for calculating, model development, model assumption management, reporting and other areas have been analyzed and assessed for possible centralizing across the organization. This has

led to a layered actuarial business process model with dedicated core competencies. Lower-level support processes have also been bundled into a central actuarial service unit run as a captive operation.

Architectures, workflows and data management have been adapted accordingly. In addition to a significant total cost of ownership reduction, the strong business case for this approach has led to further benefits as shown in Figure 8 below.

Application of Dedicated Finance and Risk Transformation Frameworks

Based on our experience, changing or transforming an insurer’s finance and risk operating model requires a holistic approach and the application of business-proven transformational frameworks. Figure 9 illustrates some of the key considerations to be addressed before undertaking such an initiative.

Figure 8. Selected Benefits of a Centralized Actuarial Service

Key Benefits

Faster Closing and Reporting

More Capacity and Higher Productivity

Trust in Results

Higher Risk and IT Functions E�ciency

Improved Security of Data

Source: Accenture, October 2014

• Main steps of the actuarial processes are automated, including preparation of the model point files• Supports preparation and execution of cash flow models

• Re-usable cash flow projection runs reduce e�ort spent on “non-value added” activities• Enabled to focus on “core” actuarial tasks: Model development and analysis or the actual interpretation of results

• Reduces the risk of errors and improves reporting process control • Examples: Data quality validation rules and reconciliations or 4-eye validation

• Better productivity through scale and specialization as appropriate functions are transferred for improved e�ciency • Examples: Transfer of the cash flow projection models to the cash flow projection system or the model validation

• Processing of data and its storage moved to centralized infrastructure • Number of controls improve security, such as role-based access control, encryption of stored and transmitted data,

implementation of security patches and others

Govern

Manage

Measure

Engagement Leadership Client Expectations Business Case Solution

Performance and Reporting Time TrackingCompliance

DemandResources

ReleasesProgram/Project planningWork planningDeliverablesQualityVendorWork environment

ContractFinance

RisksIssuesScope changes

ConfigurationDefectsRequirements

Source: Accenture, October 2014© 2013 Towers Watson. All rights reserved

Finance Application Outsourcing (or Centralized Management):Examples: Maintenance, enhancements, SAP® packages and upgrades, end-to-end testing services, finance product support, change implementation, etc.

Finance Release and Solution DevelopmentExamples: Planned releases, emergency releases, finance/risk integration services, deployment, etc.

Finance and Actuarial Business Process CentralizationExamples: Process ownerships, support structures and levels, group/business unit agreements, financial management and ‘billing’, business unit service transition and process migration

Finance Operating EnvironmentExamples: Unit operations, upgrades, software inventory

Finance Technology InfrastructureExamples: Actuarial high-performance computing environment (Towers Watson RiskAgility© cluster), SAP® Infrastructure

Manage Service

Support Operations

Deliver Service Manage Service DeliveryEventsIncidentsProblemsRequestsKnowledge

Demand monitoringChangeUser relationship

Technology Facilities Security Business Continuity

Domain monitoringRelease deliveryAvailabilityCapacity

Service introductionService decommissioning

Infr

astr

uctu

re

outs

ourc

ing

Appl

icat

ion

outs

ourc

ing

Busi

ness

pro

cess

ou

tsou

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g

18

CONCLUSION

Managing successful finance and risk transformations in the insurance industry usually involve the entire C-suite.

In our view, transformations require strong governance and collaboration from an overall operating model perspective (COO), financial and accounting perspective (CFO), risk management and actuarial perspective (CRO/Chief Actuary) and the involvement of IT (CIO) at an early stage.

Accenture has extensive experience in helping firms identify and design a properly tailored finance and risk operating model, taking into consideration the insurer’s business model, culture, approach to steer the enterprise and the desire for enterprise value optimization. We make use of our

experience, industry-proven capabilities and tools like the Accenture Delivery Suite comprising dedicated transformational methods, estimators, predefined Key Performance Indicator Repositories, and RAOM business case models. Our technology solutions and software vendor alliances help integrate these capabilities with flexible transformational service delivery, operating support and managed services for the finance, risk and actuarial functions, including on-site, near-shore, off-shore, and multi-sourcing. The entire approach is designed to align with an insurer’s vision, mission, needs and strategic decisions.

19

For more information about Accenture’s experience in managing finance and risk transformation projects at an enterprise level, please contact us to discuss.

Eva Dewor Accenture Financial Services eva.dewor@accenture.com Direct: 49 89-93081-68602

Markus Salchegger Accenture Financial Services markus.salchegger@accenture.com Direct: 49 89-93081-68910

Karsten Ebersbach Accenture Financial Services karsten.ebersbach@accenture.com Direct: 49 61-7394-67823

Daniel Kimmerle Accenture Financial Services daniel.kimmerle@accenture.com Direct: 49 89-93081-60731

NOTES1 “Accenture 2013 Global Risk Management Study,” September, 2013. Access at: http://www.accenture.com/Microsites/risk-management-research/2013/Pages/home.aspx. “Accenture Risk Management: 2012 Risk Analytics Study,” November 2012. Access at: http://www.accenture.com/us-en/Pages/insight-2012-risk-analytics-study-insights-insurance.aspx

2. “Exposure Draft ED/2013/7, A Revision of ED/2010/8 Insurance Contracts,” International Financial Reporting Standards, June 2013. Access at: http://www.ifrs.org/Current-Projects/IASB-Projects/Insurance-Contracts/Exposure-Draft-June-2013/Documents/ED-Insurance-Contracts-June-2013.pdf. “Why are we Undertaking the Project?” International Financial Reporting Standards website, Insurance Contracts. Access at: http://www.ifrs.org/current-projects/iasb-projects/insurance-contracts/Pages/insurance-contracts.aspx.

3. “Introducing Solvency II,” European Insurance and Occupational Pensions Authority website. Access at: https://eiopa.europa.eu/en/activities/insurance/solvency-ii/index.html

4. “The IASB’s Insurance Contracts project,” International Financial Reporting Standards, March 2012. Access at: http://www.ifrs.org/Current-Projects/IASB-Projects/Insurance-Contracts/Documents/ProjectHistory_InsurancecontractsMarch2012.pdf

5. “IFRS 9 Financial Instruments (replacement of IAS 39),” International Financial Reporting Standards website. Access at: http://www.ifrs.org/current-projects/iasb-projects/financial-instruments-a-replacement-of-ias-39-financial-instruments-recognitio/Pages/financial-instruments-replacement-of-ias-39.aspx

6. “The Digital Insurer – Accenture 2013 Consumer-Driven Innovation Survey,” Accenture, January 2014. Access at: http://www.accenture.com/us-en/Pages/insight-consumer-driven-innovation-survey-2013.aspx.

7. “Energizing Global Growth – Understanding the Changing Consumer,” Accenture, January 2013. Access at: http://www.accenture.com/us-en/Pages/insight-energizing-global-growth-changing-consumer.aspx

8. “Why are we Undertaking the Project?” International Financial Reporting Standards website, Insurance Contracts. Access at: http://www.ifrs.org/current-projects/iasb-projects/insurance-contracts/Pages/insurance-contracts.aspx.

9. “Accenture Finance Transformation Solution,” Accenture website. Access at: http://www.accenture.com/microsites/afts/benefits/pages/index.aspx

ABOUT ACCENTUREAccenture is a global management consulting, technology services and outsourcing company, with approximately 305,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

DISCLAIMER: This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals.

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