Professional Documents
Culture Documents
Executive summary 1
Survey methodology 2
Capital modelling 10
Capital planning 11
Contacts 12
Executive summary
The transition to Solvency II on 1 January 2016 is Capital optimisation is high on firms agendas across
the most significant regulatory change the European Europe Optimising
insurance industry has experienced in decades. Factor While firms have been very much focused on preparing
based Solvency I requirements have now been replaced for Solvency II over the last 5 years, 90% respondents
capital under
by risk based measures for calculating regulatory expect the main focus of their attention to be on Solvency II
capital either through the EIOPA prescribed Standard
Formula or insurers own Internal Models. For the
optimising capital over the next 5.
will be the key
first time, insurers solvency capital requirements are Capital optimisation strategies are getting to a newlevel area for capital
directly impacted by their investment strategies and To date, firms have primarily engaged on implementing
more traditional capital optimisation strategies such as
management
their respective balance sheets will now be sensitive
to interest rate volatility. In such an environment, asset class/sector selection, reinsurance, internal risk over the next
effective capital management will become increasingly transfers and debt restructuring. Going forward, they 5years.
important. expect to engage on risk margin solution strategies and
VIF monetisation, along with more pervasive strategies
In the second half of 2015 we carried out a Capital such as changes to group structures and tailoring of
Management Survey which covered 50 insurance firms risk profiles through M&A or reinsurance, particularly
across 10European countries and focused on the for long-tailed risks such as longevity.
following areas:
Firms are also altering product strategies in response to
Capital management organisation and governance. Solvency II, pushing further into products with lower
capital requirements.
Changes in the capital management landscape.
Communication on Solvency II capital is a current area
Capital management metrics and modelling. of challenge
In the more immediate future, stakeholder
Strategic capital management decision process.
communication around Solvency II results and their
Key messages implications is expected to be a key area of challenge.
Capital management organisation and governance
For those involved in capital management, it is fair to
isawork in progress
say that the future is bright as it is likely to be filled
Companies are devoting more resources to capital
with many challenges. As we move past Solvency
management than before. Whilst the ultimate
II implementation, it is now time to focus on
responsibility for performing capital management
understanding how balance sheets react to economic
activities typically rests with the CFO, many
conditions in real time and the types of risks and
departments perform capital management related
volatility firms are willing to accept rather than mitigate.
activities. This reinforces the importance of ensuring
that there is appropriate organisation and governance We hope you find this survey thought provoking as you
around capital management. move forward with your capital plans.
Results presented throughout the document % of respondents by assets under management (AUM)
arerounded.
20%
35%
45%
2
Capital management organisation,
governance and resources
Organisation & governance What areas in your firm play an important role in capital
Capital management is not organised or governed in management decisions?
Less than 50%
a standard way across the European insurers surveyed,
indicating that insurers still have some way to go to embed
of respondents
90%
Solvency II fully into their decision making processes.
Risk department
have a
Less than half of respondents have a dedicated,
A Capital Management 74% dedicated,
or Risk/Capital Committee
standalone capital management department. Even standalone
where firms have such a department, many depend
on activities performed across a number of separate
Actuarial department 58%
capital
departments such as risk, actuarial and investment.
An Asset Liability
Committee (ALCO) 46%
management
Reliance on these areas is driven primarily by the technical or Investments Committee
department.
nature of the skillsets required under Solvency II. A stand-alone capital
42%
However, most respondents with standalone capital management department
management departments indicated that the
38%
responsibility for identifying and implementing capital Investments department
Strong and
optimisation initiatives and the monitoring of capital
did lie within this department. Other within finance 22% appropriate
From a governance perspective, capital management
governance
related decisions are currently made across a number
Treasury department 22%
is needed to
of different committees such as Risk/Capital and
Other outside of finance 8%
support a
Investments committees, even where a standalone
Capital Management committee is in situ. 0% 50% 100%
holistic view
of capital
Where multiple individuals/departments are responsible
for various capital management activities, there is a Who does the department, committee or person in charge
management.
significant risk that the bigger picture will be missed due of capital management report into?
to the lack of a joined-up view. Firms should ensure
strong and appropriate governance is put in place to
support a holistic view of capital management and CFO 60% The CFO is the
ensure no potential opportunities are missed. most common
Reporting lines
CRO 21% reporting line
Whilst risk departments are deeply involved in capital for capital
management, our survey indicates that, with the 9%
exception of Ireland and Greece, the CFO typically has
CEO
management
ownership of this area.
Board 4%
activities.
In our view, this will continue to be the case under
SolvencyII, in particular because most capital Chief Actuary 4%
management initiatives require significant input and
direction from theCFO.
Head of Corporate
2%
Governance
As a reinforcement of this view, its worth noting that, of
the 11 head offices of large insurance companies included 0% 50% 100%
to capital Austria & Germany 5 Not surprisingly, the number of FTEs varies by firm size
6 4.8 4.6
4 3.1
0
1 Less than 2 Between 3 Between 4 Above
25 billion 25 billion 50 billion 100 billion
and 50 billion and 100 billion
4
Changes in capital management
Changes over the last five years Changes in capital management which have occurred over the last 5 years, as it relates to
The capital management landscape has changed operating model/decision making/strategies
Overall, such results are not surprising as firms review Stress testing procedures 36%
the structures and risks generating the greatest capital
Regulatory documentation 36%
requirements and impacting volatility levels within their and interaction
Solvency II balance sheets. In particular, we expect to
continue to see a broader range of capital optimisation Enhanced operating model 28%
0% 50% 100%
The most common capital optimisation strategies Almost half of the firms surveyed have started to
The most currently in use across the firms surveyed were asset alter their product strategy in response to Solvency II.
class and sector selection, internal risk transfers, In particular, we have observed that firms are beginning
common including the introduction of an intra-group reinsurer to put more emphasis on unit-linked products.
capital and debt restructuring/sub-debt issuance. It was
In the run up to year end, there was a marked increase
optimisation also interesting to observe that firms with internal
models are considering how these could be further in activity in the longevity swap market as firms looked
strategies refined, while many currently on standard formula are to offload such risk in response to the increased capital
currently in use considering the use of an internal model. requirements as well as the introduction of capital
requirements for the first time for in situ employee
are asset class Whilst such techniques are more focused on firms benefit schemes.
and sector existing business, firms are introducing new and more
innovative solutions with respect to their new business
selection, in the face of increased capital requirements and
internal risk a challenging investment environment.
transfers
and debt Capital optimisation strategies currently used
Unit shorting 6%
Actions to recover the impact of contract boundaries
on technical provisions 6%
Unitising WP guarantees 2%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
6
Capital optimisation strategies
under consideration
Most firms recognise the importance of optimising The types of changes to firms group structures being
their capital under Solvency II and, to this end, have investigated can vary as existing firm structures are A diverse range
already implemented those strategies which were more not standard in nature and, therefore, the solutions
straightforward in nature and/or yielded the greatest to optimise capital need to be tailored to each firm
of capital
benefit for their respective businesses. However, there individually. For example, a branch structure may make optimisation
does appear to be a reasonable proportion of firms
who still need to identify what strategies they should
more sense than a subsidiary structure if a European
insurance group has subsidiaries throughout a number
strategies
focus on post Solvency II implementation. of countries in Europe. The advantages to this include: are being
A diverse range of optimisation strategies are being the potential for higher diversification benefits;
considered.
considered, with the two most common being risk It will be key to
fewer solo reporting submissions; and
margin solutions and changes to firms respective group prioritise and
structures.
increased fungibility of capital. plan the various
The risk margin solutions being considered are typically
being driven by firms looking to both hedge their interest
For firms headquartered outside of the European options.
Economic Area (EEA), it is likely to be beneficial to
rate exposures, as well as transfer some of the underlying
separate EEA and non-EEA operations, through the
risks that drive the risk margin. In particular, the risk margin
use of holding companies, in order to avoid Solvency II
can be extremely long-tailed where firms have longevity
requirements being applied to the entire operations of
risks and/or long-tailed general insurance risks. In turn,
the group. This has been done by a number of groups
this results in the risk margin being sensitive to changes in
in recent years.
interest rates; this sensitivity is particularly acute within a
low interest rate environment, an issue which is pervasive
across most countries in Europe currently.
consuming and/ VIF monetisation came through quite strongly, in From our experience across the market, only the large
or volatile risks particular in France and Ireland, where there was the firms have considered the full suite of optimisation
highest number of firms currently considering this opportunities. Other firms have been more focused
to continue. technique. VIF monetisation is not a new concept and on implementing Solvency II, in particular PillarIII.
it has been used many times across Europe over the However, as we are now post implementation,
last decade. However, increased capital requirements, we expect the focus to significantly shift to the
contract boundaries and potential drains on liquidity are identification, prioritisation and implementation of
likely some of the main drivers behind its resurgence. capital optimising strategies.
8
Capital management metrics
Metrics used for capital management That being said, it is acknowledged that for territories
Key metrics being used to project firms growth where the regulator has publicly stated that transitional Return on
strategies from a capital management perspective have measures will not be a restriction to paying dividends,
changed. In particular, a high return on Solvency II or their use by firms in these territories will be looked upon
Economic
economic capital is the most common high-priority more favourably. In addition, it will be interesting to see Capital is now
capital management metric being used by the European
insurers surveyed. The second most common metric is
the Solvency II metrics presented by firms within public
disclosure documents such as Solvency and Financial
a key capital
ahigh return on equity from an IFRS/GAAP perspective. Condition Reports during 2017. Such documents will management
We observed similar results across survey respondents in most certainly become very important documents for metric.
all countries. firms in terms of communicating explanations of their
Solvency II results to analysts. Weexpect firms will focus
Our observations of discussions with the analyst considerable attention on drafting and/or refining these
community for the European insurance markets suggest documents during 2016.
that cash generation will continue to be a key focus
post the introduction of Solvency II, and may even
become a greater focus. The expectation is that analysts
will continue to look at IFRS earnings and operating
income in the same way as they do presently. However,
with respect to Solvency II metrics, some analysts have
indicated that they will look-through any transitional
measures that a firm may have implemented for
SolvencyII.
Key metrics used from a capital management perspective when projecting a growth strategy
Cash
High ROE (Economic Capital or Solvency II) 72% generation
High ROE (IFRS) 60%
continues to be
an important
High operating income 50% KPI.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Other 12%
0% 50% 100%
10
Capital planning
Strategic capital management decisions & capital Capital planning projection horizon
planning projections In terms of capital planning projections, there is a Dividend and
More areas of the business are now involved in capital 60/40split by respondents between a 3 year versus
planning processes, with an increased focus by firms on alonger planning cycle.
reinsurance
strategic capital management decisions as part of the decisions are
Firms writing life business tend to plan over a longer
process. Such capital management decisions are being
informed by outputs from multi-year projections of time horizon, with almost half using a planning cycle
informed
capital source and use. greater than 3 years. The equivalent figure is 25% for by capital
Currently dividend policy and use of reinsurance are the
firms writing both life and non-life business. Interestingly,
larger firms typically only plan over a 3 year time
planning.
two strategic capital management decisions most closely horizon(82%).
linked with a multi-year planning horizon, followed by
product strategy. For head offices of large European In France, the local supervisor has recently requested
insurance firms, debt/equity financing came through ORSA scenarios over a 5 year time horizon. This may
strongly possibly reflecting the types of decisions trigger changes to firms planning horizons in the future.
made locally versus at head office. The use of multi-year It will be interesting to see if other European regulators
planning horizons is not surprising given that firms want follow suit, especially for firms with longer duration
to ensure they fully understand the consequences of liabilities.
particular decisions on their Solvency II balance sheet
and that they are demonstrating good governance and
Planning cycle for the annual corporate operating plan,
use test evidence of decisions they are taking. including capital sources and uses Planning
It will be interesting to see if firms adopt a more horizons tend
conservative approach to strategic decisions, in particular to be between
dividend payments in the first years of the Solvency II
regime due to the additional volatility in both balance 3 and 5 years
sheets and capital metrics. In some jurisdictions, the 38% depending
regulator has a right of objection to certain strategic
decisions and again how they will act in the context of
on business
the information presented will be interesting to observe. duration.
62%
0% 50% 100%
Belgium Italy
Arno de Groot Alessandro Ghilarducci
Partner, Governance, Regulatory and Risk Partner, Consulting
+32 (2) 800 24 73 +39 (0)2 83 32 30 57
adegroote@deloitte.be aghilarducci@deloitte.it
Austria Poland
Daniel Thompson Renata Onisk
Partner, B&W Deloitte Partner, Consulting
+43 (153) 700 547 4 +48 (22) 511 0529
danthompson@deloitte.com ronisk@deloittece.com
Germany Switzerland
Peter Bruhns Colin Forrest
Partner, Deloitte Consulting GmbH Partner, Consulting
+49 (511) 302 331 41 +41 (0)58 279 7050
pbruhns@deloitte.de colforrest@deloitte.ch
12
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