• Industry: Financial Services, Insurance
  • Type: Business and industry issue
  • Date: 2/20/2012

Evolving global solvency developments 

Evolving global solvency developments
An exploration of the current array of solvency issues at play across the global market and insights into their likely impact on insurers. With competitive advantage now more dependent than ever on effective risk management and the informed decisions that flow from it, we explain why and how insurers will need to embed into their operating models much more effective risk management systems – systems that will allow them to move beyond mere compliance toward value creation.

Around the world, many jurisdictions are beginning to reform their insurance requirements – thereby offering insurers a unique window of opportunity within which they can transform their risk management and finance operations.

Insurance risk management has historically focused on value protection, specifically reducing the incidence and severity of losses, lowering maintenance costs and informing investment and underwriting decisions.

While these remain critical considerations, a forward-looking value creation approach is emerging. This more cost effective approach goes further to support business strategy and improve decision-making – through enhanced information quality and understanding. In the current environment, this new approach can result in more optimal utilization of capital.

Risk management: the value challenge

Amid the ongoing fall out from the Global Financial Crisis, investors are demanding much more certainty.

It seems likely, therefore, that – rather than simply resting on their compliance laurels – insurers will instead be driven to look for value-enhancing initiatives.

In essence, insurers will need to build on their solvency platforms to optimize business performance and facilitate competitive advantage.

In Europe, Solvency 2 offers a good example of the progressive transformation that’s beginning to emerge among insurers’ risk and finance operations, download the report, available to the right, for more details.

The key lessons from Solvency 2 experience will be of particular benefit to insurers about to experience regulatory change in their home markets.

Insurers that can look to the longer term can drive real competitive advantage through the effective embedding of a transparent and persuasive risk culture throughout the decision-making process. The benefits of a comprehensive risk management framework will be achieved by those who not only fully understand the risks currently facing the business but also what risks they may face in the future.

Furthermore, where risk management disciplines are effectively aligned to business strategy, capital planning and product development processes, there be a better understanding of the incremental profit of each product line or business unit at a more granular level.

In turn, this may drive a much more complete understanding of the Risk Adjusted Return on Capital, therefore facilitating the allocation of available capital towards the most strategically important and profitable products and businesses. Ultimately, this can generate a real improvement in shareholder value.

Some implications for insurers include:

  • clear benefits for performance results, such as higher returns from risk-adjusted capital, improved capital allocation and an optimized business mix, distribution channels, customer segmentation and product development based on higher quality risk and value data
  • superior management information derived from a better understanding of risk-adjusted returns across lines of business and investment alternatives, as well as a clearer view of value drivers and destroyers.

Next steps for insurers

Prior to investing in better risk management, executives should undertake a diagnostic analysis in order to align risk management with both their organization’s strategic goals and the overall business model, in order to identify opportunities for value creation.

Meanwhile, insurers should consider efficiency, effectiveness and how embedded the systems are.

Finally, chief risk and financial officers need to become fluent in articulating the value that risk management and finance systems add to their businesses – rather than simply the value they protect.


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