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Managing business performance in turbulent times
XII Yalta International Financial ForumGeorge Belyankin19 September 2012
© 2012 Towers Watson. All rights reserved.
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
European insurers face many challenges
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Falling and turbulent stock markets
Low interest rate and large rises in yields on some 'risk free'
sovereign bonds
Week growth, QE3 and inflation outlook
Changes in regulation(Local regulation, Solvency
II, gender ruling)
High frequency in catastrophe losses
Shifting in consumer preferences and behaviour
Importance of ratings
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Outlook for the European insurance sector
(Re) Regulation
•Trend from deregulation to regulation in response to financial crises
•Solvency II implications for capital, business processes and systems, products and
competition
•Basel III affecting bancassurance, e.g. banks divesting from insurance
•Wider interventions, e.g. Gender Directive
Low interest rate environment
•Persistent period of low interest rates – US 10 year Treasury Notes yielding less than
2% pa and UK 5 year gilts yielding less than 1.5% pa
•PC insurers use capital and insurance reserves to support negative underwriting
results
•PC insurers also increasingly conservatively invested, e.g. c. 75% held in bonds
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Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Outlook for the European insurance sector
High frequency of catastrophe losses
•2011 was one of the worst year for cat insurance losses
•Japan earthquake - $35bn
•New Zealand earthquake - $12bn
•Thai flood losses - $11bn
•Affecting capital position and earnings for insurers
•Some corporate fatalities (e.g. Hardy)
Inflation outlook
•Inflation arising in response to quantitative easing and monetary policies
•Inflation is a particular concern for PC insurers, who are not adequately hedged against it
Asset /Liability constraints
•Life insurers have constraints on capital decisions from embedded options and
guarantees which can be material in the current economic environment
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• US Alabama storms - $7bn
• US Missouri storms – $7bn
• Hurricane Irene - $5bn
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Outlook for the European insurance sector
Shifting consumer preferences and behaviour
•Increased use of online price comparison websites leading to unexpectedly greater
competition
•Current economic environment encouraging demand for new life products, e.g.
immediate annuities, guarantees and other options
•Lower levels of consumer living standards will put pressure on demand and price
sensitivity of insurance products
•Speeding up in the uptake and acceptance of new technologies (e.g. telematics) and
new business models (e.g. usage based insurance)
Importance of ratings
•Importance of rating agency ratings
•Number of downgrades
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Business impact is high and companies have been responding in different ways and at different speeds
• State support• Investment changes• Identification and removal of value
destroying activity• Focus on expense management • Acquisition and divestments
• Substantial drop in asset values • Solvency/capital issues• Strain on profit performance
• Market changes• Shrinkage in market size due to
greater austerity• Consumer drive for low margin
products• Business models appearing
unsustainable/inefficient
…early responsesKey performance issues…
Speed of reaction depends on boardroom’s view of the long-term consequences of the economic turmoil
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Managing business performance in turbulent times
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© 2012 Towers Watson. All rights reserved.
Re-establish strategic objectives and priorities
Manage to these objectives: Companies have been doing the following
Capital management and restructuring
Investment management
Improving portfolio performance: in-force and new business portfolios
Business efficiency and cost reduction
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Build sustainable and robust business model for the future
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Capital management and restructuring – impact on business performance
Understanding your financial objectives is critical:
Is return on capital or capital efficiency a strategic objective?
Do opportunities exist to utilise the capital generated?
Choices will depend on your objectives:
Capital, operating profit, embedded value
Trade-off between capital and profit
Significant costs of restructuring:
Impact on achievement of strategic objectives
Communication
© 2012 Towers Watson. All rights reserved.
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Investment management
© 2012 Towers Watson. All rights reserved.
• Poor/volatile performance has direct impact on total return
• Improve performance through investment in new/specialised asset classes
• Levers for reducing cost
• Centralised treasury management
• Successful performance attracts new business AND increases P&L income
• Levers for improving investment performance:
• Levers for reducing cost of investment management:
Shareholder Owned AssetsUnit Linked Assets
Investment management choices should align closely with the revised financial objectives and capital position
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Improving portfolio performance
Detailed understanding of your business and underlying portfolios Robust management Information and portfolio analysis
Value creators and the value destroyers
Detailed understanding of cross-subsidies and expenses
Quick wins: Pricing strategy redesign / new products
Expense reduction
Renegotiate/redesign reinsurance
Process and governance Clear process with targets, accountabilities, timelines
Strong project management required to ensure delivery
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Through deep, analytical understanding of your portfolio
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Pricing strategy
Price DeliveryImplementation
Price and Underwriting Assessment
CommunicationDecision making
Risk Cost Modelling
Performance Monitoring
Customer Behaviour Modelling
Analysis
Data Skills ToolsRegulation and Risk Management
Foundation
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New products - what insurers gain from UBI
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UBI is here. Only the pace of significant mass-market adoption will vary by territory
DifferentiatedConsumer
Proposition
ClaimsReduction
Enhanced RiskSegmentation
UBIImprove driving behavior
Less frequency and severity
Enhanced claim handling
Actual driving behaviour — not proxies
Step-change
Not unfairly discriminatory
Game changing de-commoditisation
Improved knowledge of your customer =
Increased loyalty
Valued productsand services
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Business efficiency and cost reduction
Strategic assessment Process inefficiency/ Duplication of activities/Manual processing / Low productivity
Weak procurement
Outdated /poorly designed IT system
Misaligned compensation strategy
Diagnostics Identification and prioritization of cost reduction opportunities
Impact assessment: strategy, P&L, cash flow, capital, risk
Intangible assets: brand, people and talent, management time and disruption,
Customers, shareholders, analysts, distributors, suppliers, regulator
Implementation and Change management Planning, quick wins
Communication, building confidence
© 2012 Towers Watson. All rights reserved.
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Risk and Financial Services
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Talent and Rewards
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• Employee Surveys
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