Strengthening governance, risk and compliance in the insurance industry An Economist Intelligence Unit report Sponsored by SAP © Economist Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry Preface Strengthening governance, risk and compliance in the insurance industry is an Economist Intelligence Unit report sponsored by SAP The Economist Intelligence Unit bears sole responsibility for this report The Economist Intelligence Unit’s editorial team conducted the interviews and wrote the report The findings and views expressed in this report not necessarily reflect the views of the sponsor Dan Armstrong was the editor of the report and Mike Kenny was responsible for layout and design Our thanks are due to all of the survey respondents and interviewees for their time and insights February 2009 Strengthening governance, risk and compliance in the insurance industry © Economist Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry I nsurance companies have long struggled to gain greater efficiency and transparency in their financial processes through automation and process redesign Their efforts have generally been focused on the negative goals of controlling costs, reducing sudden financial shocks and avoiding regulatory sanctions However, some companies are discovering that a more integrated approach to managing financial processes can be a source not only of efficiency but also of strategic advantage Many companies are aiming at achieving that added value through governance, risk and compliance (GRC) initiatives, which embed rules, processes and controls in keeping with a carrier’s operating policies and strategic objectives These measures provide greater transparency into day-to-day operations, help to identify potential risk exposures, and enable companies to react in a timely fashion to emerging risks GRC is characterised by efficiency and accuracy, but can also add the dimension of providing a synoptic picture of risk to support strategic decision-making That sort of insight has become suddenly much more important in 2009, in the wake of a financial crisis that could just as accurately be termed a risk management crisis While strict solvency requirements helped the insurance industry to weather the crisis better than their counterparts in banking and securities, some insurers did encounter unforeseen exposures in their investment portfolios, the consequences of which are yet to be fully realised There is little question that many insurers lacked the capability to develop a comprehensive picture of risk exposure at a corporate level, comprising credit, market and operational risk Moreover, insurers operating in the European Union face challenges stemming from the updated set of regulatory requirements known as Solvency II The Supervisory Review Process of Solvency II aims to identify institutions with financial, organisational or other features that result in a higher risk profile Because the authorities will review financial processes as well as governance and capital reserves, it will be necessary to know who know who participates in each process, what the person does, and the results of the process The problem with autonomy Achieving a unified enterprise view of financial process remains an almost quixotic goal in much of the insurance industry because of the operational autonomy of business units Even in companies that enjoy a high degree of process automation, consistent use of practices and tools across the enterprise © Economist Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry Figure 1: Insurers struggle with complexity, inconsistency and incompatibility What are the biggest problems with your current financial processes? Select up to three (% respondents) Complex procedures which are difficult to model or automate 36 Inconsistent methodologies around the organisation 36 Incompatible technology (eg, customised spreadsheets, databases and commercial products) 33 The need to reconcile inconsistent or redundant data from multiple sources 33 Boundaries between departments, with departmental managers trying to hold on to authority 29 Too many manual processes 29 Controls which are too numerous or restrictive 21 Portions of the process depend on individuals who are not always available 19 Lack of visibility and accountability 16 The need to document audit trails 12 Other Source: Economist Intelligence Unit survey, 2009 is rare As Figure shows, insurers struggle with complex procedures, inconsistent methodologies and incompatible technology In order to produce a complete financial picture on which to base decisions, survey respondents report the need to reconcile inconsistent or redundant data from disparate sources To some degree insurers are more concerned about the risks of improving their processes than the risks those processes can reveal, as illustrated by Figure Nearly half of the respondents cited high cost as a barrier to standardising and automating financial processes They also reported difficulties caused by the complexity of modeling financial process and the incommensurability of regulatory regimes within different lines of business Responses also showed that the siloed organisational structure of insurance companies made securing buy-in from line-of-business managers more difficult than corporate-level leadership Securian Financial, a $2.8 billion US life insurer based in Minnesota, eased its transition to an economic capital-based approach to risk management by enlisting business managers into working About the survey In 2008 and early 2009, on behalf of SAP, the Economist Intelligence Unit surveyed 446 senior executives from ten industries about their views on their financial processes and their attempts to improve them Of this total, 58 came from the insurance industry (both life and property and casualty) It is these insurance executives upon which this paper is based Of these respondents, 30% hailed from Europe, 25% from North America and 20% from the Asia/Pacific region Over half worked for companies with annual revenues in excess of $1bn One-third have positions in the C-suite and another 24% came from the VP level or higher Most respondents served in the finance, risk management, strategy, business development or operations functions © Economist Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry Figure 2: Insurers want to improve data integrity and cut back on manual processes What would be the biggest benefits of an initiative to standardise and automate your financial processes? Select up to three (% respondents) Enhancing data integrity 50 Cutting back on manual processes, decreasing risk of error 48 Freeing staff from routine number-crunching, redeploying into higher-value activities 43 Meeting compressed deadlines/improve response time 34 Reducing costs 24 Better visibility into origin of numbers and how they are calculated 17 Standardisation of methodologies around the enterprise 16 Higher productivity 16 Able to set risk thresholds, data access and other controls centrally 12 Better compliance with regulatory requirements 10 Able to identify and resolve bottlenecks Fewer opportunities for fraud Other Source: Economist Intelligence Unit survey, 2009 groups on key topics “Our approach was to work with them to achieve ‘quick wins’ demonstrating the advantages of the new way of measuring risk and value,” says Vice President and Chief Actuary Leslie Chapman “For example, we formed an asset/liability management group We have found that by having every business line actively engaging in dialogue has help drive buy-in.” Chapman credits a combination of corporate risk management culture and the power of automation in enabling Securian to more precisely measure and project risk exposure By building a platform allowing a view of risk from an economic capital perspective, the company is able to see the impact of decisions from multiple perspectives, which simultaneously enables more secure and more opportunistic management of risk “We have enhanced our financial processes and reporting over the years so that we can spend less time quantifying and more time analysing,” comments Chapman “We couldn’t this at all without automation But the value is multiplied as we get faster, enabling us to spend more time on decisionmaking, which results in higher-quality decisions.” Securian is clearly not alone in its appreciation of the potential benefits of more automated financial processes as demonstrated by survey respondents’ reports of the benefits their companies have enjoyed (Fig 3) Respondents say that higher levels of automation have yielded faster processes with fewer errors while at the same time requiring less staff to manage them By embedding risk assessments into financial processes, two-thirds of respondents’ enjoyed greater efficiency and over 80% reported higher-quality decisions © Economist Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry Figure 3: Insurers say automation yields greater speed, lower costs and better decisions Percentage reporting increase as a result of process automation Percentage reporting decrease as a result of process automation Number of poor-quality decisions Audit costs Control errors Time required Headcount -70 -60 -50 -40 -30 -20 -10 10 20 Source: Economist Intelligence Unit survey, 2009 Despite these successes, very few insurers have overcome either the cost and difficulty barriers to achieving enterprise GRC capability Few companies have developed the discipline of balancing asset and liability risk and tend to manage these portfolios independently Most insurers continue to manage “through the rear-view mirror,” attempting to predict the future solely on past performance, often on the basis of stale reports Few companies can produce accurate, near-real-time information to support decision-making, and fewer still have mastered scenario analysis and regular risk stress-testing While insurers have become very comfortable with many tools and technologies within operational silos, the industry at large has not invested in the capabilities needed to correlate all of its risk exposures and track their interdependencies The value of aligned processes While manual processes present opportunities for error, slow the distribution of vital information and keep executives from higher-value tasks, the dichotomy of good versus bad management is more important than that of manual versus automated processes Automation is key to competing at an accelerated pace of business But sound manual practices reveal the full potential of GRC In any case, successful GRC initiatives will not mean the total abolition of manual processes “I am less concerned about manual processes than having an aligned approach to risk management across the overall organisation,” observes Axel Lehman, chief risk officer of Zurich Financial Services, a $55 billion company that does business in more than 170 countries “Whether I get risk reports from Japan or South Africa, I want to know that like risks are reported in the same way.” That degree of uniformity is impossible without a commitment to risk management as a corporate priority from top management From the management level, risk culture must be instituted throughout every level of the organisation, in order to fully understand risk both at local and corporate levels “Companies need risk aggregation capabilities in place that allow them to look at risk in an aggregated, enterprise-wide view,” comments Lehman “One of the essential lessons of the financial crisis is the need for a holistic view of risk.” Risk management begins at Zurich with a board risk committee, followed by the CEO, who is ultimately Strengthening governance, risk and compliance in the insurance industry © Economist Intelligence Unit Limited 2009 responsible for risk management As chief risk officer, Lehman shares risk management with other members of the executive team, who in turn work with business unit leaders, who are responsible for observing risk management procedures and standards while retaining the independence they need to function as business managers Zurich has implemented a Risk Modeling Platform with the ability to tap into other information systems and reconcile information That gives the insurer the ability to understand local risks and aggregate them up through various levels of the organisation Zurich has also instituted what it calls Total Risk Profiling, which identifies and records risk at all levels of the organisation, and it has implemented an economic capital framework to project return on risk-based capital in the company’s strategic decision-making Too often insurers limit their risk management activities to the negative goals of protection, reducing earnings volatility, protecting the capital base and otherwise insulating the franchise from negative surprises, Lehman believes He regards that approach as necessary but not sufficient “Risk management in a well-managed company is used to support profitable risk-taking and growth,” he says “It is not only about being aware of the risk exposure, but strategically shaping the risk/return profile of the organisation © Economist Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry Conclusion I nsurance companies were among the original adopters of information technology, and their actuaries, underwriters and accountants have demonstrated interest and even mastery in the use of a broad range of technological tools in recent times However, the traditional independence of business lines and the functions within them have contrived to render the insurance industry a laggard in process automation even in the core functions of governance, risk management and compliance that have special importance in a highly regulated industry dedicated to the profitable transfer of risk Moreover, when insurers have adopted technology to upgrade governance, risk and compliance processes, the focus has been on reducing costs and increasing efficiency rather than providing an integrated picture of risk to support better decisions Cost reduction is still a compelling argument for moving forward, especially in a stagnant economy But the less heralded benefits—which ultimately may be more important—have to with improving the quality of decisions Companies have managed to be profitable despite their dependence on manual processes, but as the pace of business accelerates, the speed and efficiency afforded by automation becomes more important Even more important is the need to have an enterprise-wide picture of risk and the ability to identify and react to emerging risks Risk is opportunity for insurers, but they need a tighter grip on their overall portfolio of risk with the emergence of new and imperfectly understood risks, such as those associated with the financial markets, rapid change in laws and regulations, information security vulnerability, climate change, political instability and terrorism An example of how financial process integration can generate returns rather than simply reduce costs might be the effort by property and casualty insurers to target home and auto insurance policies by location Underwriting guidelines have long distinguished among risks in different postal codes Adding precise elevation data by latitude and longitude allows insurers to go further and target, for instance, high-elevation addresses in a postal code dominated by a flood plain Similarly, a life insurance company might be able to quickly model and price the actuarial effects of, for instance, a widespread outbreak of avian flu Companies that integrate risk, pricing, location and sales activities should be able to “cherry pick” high-margin, low-risk underwriting opportunities Ultimately risk management is about management, not modeling In the end, technology supplies input for decision-making, not the decisions themselves Nevertheless, with a holistic implementation of GRC, governance risk and compliance are consistently defined, closely linked and embedded throughout the organisation through end-to-end processes and controls Well-designed automated processes efficiently integrate financial reporting, compliance and risk monitoring into daily operations Furthermore, they afford greater ease of modification, giving insurers the ability to react to changes in the marketplace Finally, they not only reinforce the protective aspects of risk management but they also provide the basis for strategic risk management as an engine of profitability Appendix Survey results: Insurance respondents only Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry Appendix Survey results: Insurance respondents only What would be the biggest benefits of an initiative to standardise and automate your financial processes? Select up to three What are the biggest problems with your current financial processes? Select up to three (% respondents) (% respondents) Complex procedures which are difficult to model or automate 36 Enhancing data integrity 36 Cutting back on manual processes, decreasing risk of error Inconsistent methodologies around the organisation 50 Incompatible technology (eg, customised spreadsheets, databases and commercial products) 48 Freeing staff from routine number-crunching, redeploying into higher-value activities 33 The need to reconcile inconsistent or redundant data from multiple sources 43 Meeting compressed deadlines/improve response time 33 Boundaries between departments, with departmental managers trying to hold on to authority 34 Reducing costs 29 24 Too many manual processes Better visibility into origin of numbers and how they are calculated 29 17 Controls which are too numerous or restrictive Standardisation of methodologies around the enterprise 21 16 Portions of the process depend on individuals who are not always available Higher productivity 19 16 Lack of visibility and accountability Able to set risk thresholds, data access and other controls centrally 16 12 The need to document audit trails Better compliance with regulatory requirements 12 10 Other Able to identify and resolve bottlenecks Fewer opportunities for fraud Other What would be the biggest drawbacks of an initiative to standardise and automate financial processes? Select up to two (% respondents) High level of investment required 47 Difficulty of getting buy-in from business lines/regions 28 Difficulty of modeling complex financial processes 26 Multiple regulatory regimes make compliance rules unique by business and/or region 24 Difficulty of getting buy-in from senior management 21 Organisation is too diverse in its business lines 17 Business model and operations are unique 14 Financial processes are sufficiently fast, efficient and accurate now Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry Appendix Survey results: Insurance respondents only In the past five years, which of the following tasks has your organisation attempted to address by improving its financial processes? Select all that apply (% respondents) Increase level of automation for processes in general 76 Prioritise controls based on risk assessments 50 Increase level of automation for internal controls 48 Realign segregation of duties 43 Reduce redundancies 34 Other We have not attempted to improve our financial processes What improvements, if any, have resulted from these attempts? Increase level of automation for processes in general (% respondents) Much higher Higher No change Lower Much lower Don’t know Headcount 11 32 48 14 Time required 11 14 57 Control errors 7 16 56 Audit costs 43 25 14 14 Number of poor-quality decisions 25 45 What improvements, if any, have resulted from these attempts? Increase level of automation for internal controls (% respondents) Much higher Higher No change Lower Much lower Don’t know Headcount 19 31 42 Time required 19 19 48 15 Control errors 19 11 44 22 Audit costs 11 44 22 11 Number of poor-quality decisions 20 48 16 What improvements, if any, have resulted from these attempts? Reduce redundancies (% respondents) Much higher Higher No change Lower Much lower Don’t know Headcount 11 11 11 11 21 53 Time required 11 53 11 Control errors 11 17 56 6 Audit costs 11 50 17 17 Number of poor-quality decisions 28 39 22 Appendix Survey results: Insurance respondents only Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry What improvements, if any, have resulted from these attempts? Realign segregation of duties (% respondents) Much higher Higher No change Lower Much lower Don’t know Headcount 25 38 25 38 Time required 21 33 Control errors 22 30 39 4 17 5 Audit costs 22 57 Number of poor-quality decisions 55 32 What improvements, if any, have resulted from these attempts? Prioritise controls based on risk assessments (% respondents) Much higher Higher No change Lower Much lower Don’t know Headcount 21 59 14 Time required 28 28 41 Control errors 11 25 61 Audit costs 17 31 31 14 59 14 Number of poor-quality decisions 17 Does your organisation regularly include risk evaluations as part of its financial processes? (% respondents) Yes 79 No 17 Don’t know What are the results of these risk evaluations? (% respondents) Much better Better No change Worse Much worse Don’t know Quality of decisions 11 72 17 Efficiency of processes 53 36 Prioritisation of controls 17 10 53 28 Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry In which country are you personally located? (% respondents) Appendix Survey results: Insurance respondents only In which region are you personally based? (% respondents) United States of America 20 Western Europe 30 United Kingdom South Korea Canada Nigeria Brazil 4 North America 25 Asia-Pacific 20 Middle East and Africa 14 Latin America Eastern Europe China India Netherlands Switzerland What is your primary industry? (% respondents) Australia 2 Financial services 100 Belgium 2 Croatia 2 Czech Republic 2 Denmark 2 Germany 2 Ghana 2 Hong Kong 2 In which sub-sector of financial services does your organisation belong? (% respondents) Hungary Israel Kenya Insurance 100 Latvia Mexico Poland Puerto Rico South Africa Spain Thailand Turkey Zimbabwe 11 Appendix Survey results: Insurance respondents only Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry What are your organisation’s global annual revenues in US dollars? What are your main functional roles? Please choose no more than three functions (% respondents) (% respondents) Finance $500m or less 26 $500m to $1bn 19 45 Risk 40 $1bn to $5bn 16 General management $5bn to $10bn 19 Strategy and business development $10bn or more 19 34 29 Marketing and sales 16 Operations and production 14 Customer service 12 IT Human resources Which of the following best describes your job title? (% respondents) R&D Board member Information and research CEO/President/Managing director Legal 10 CFO/Treasurer/Comptroller Procurement 16 CIO/Technology director Supply-chain management 0 Other C-level executive Other SVP/VP/Director 24 Head of Business Unit 12 Head of Department 14 Manager 12 Other Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsors of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper 12 LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com [...]... Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry What are your organisation’s global annual revenues in US dollars? What are your main functional roles? Please choose no more than three functions (% respondents) (% respondents) Finance $500m or less 26 $500m to $1bn 19 45 Risk 40 $1bn to $5bn 16 General management $5bn to $10bn 19 Strategy and business... respondents) Yes 79 No 17 Don’t know 3 What are the results of these risk evaluations? (% respondents) Much better Better No change Worse Much worse Don’t know Quality of decisions 11 72 17 Efficiency of processes 6 53 36 6 Prioritisation of controls 17 10 53 28 3 0 Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry In which country are you personally located?...Appendix Survey results: Insurance respondents only Economist Intelligence Unit 2009 Strengthening governance, risk and compliance in the insurance industry What improvements, if any, have resulted from these attempts? Realign segregation of duties (% respondents) Much higher Higher No change Lower Much lower Don’t... Appendix Survey results: Insurance respondents only In which region are you personally based? (% respondents) 4 United States of America 20 2 Western Europe 30 United Kingdom 9 2 South Korea 7 2 Canada 5 2 Nigeria 5 2 Brazil 4 2 4 2 4 2 North America 25 Asia-Pacific 20 Middle East and Africa 14 Latin America 7 Eastern Europe 4 China India Netherlands 4 2 Switzerland 4 What is your primary industry? (% respondents)... SVP/VP/Director 24 Head of Business Unit 12 Head of Department 14 Manager 12 Other 5 Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsors of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper 12 LONDON... 19 34 29 Marketing and sales 16 Operations and production 14 Customer service 12 IT 7 Human resources Which of the following best describes your job title? 5 (% respondents) R&D 5 Board member Information and research 2 3 CEO/President/Managing director Legal 10 0 CFO/Treasurer/Comptroller Procurement 16 0 CIO/Technology director Supply-chain management 0 0 Other C-level executive Other 5 3 SVP/VP/Director... Australia 2 2 Financial services 100 Belgium 2 2 Croatia 2 2 Czech Republic 2 2 Denmark 2 2 Germany 2 2 Ghana 2 2 Hong Kong 2 2 In which sub-sector of financial services does your organisation belong? 2 (% respondents) Hungary 2 Israel 2 Kenya 2 Insurance 100 2 Latvia 2 Mexico 2 Poland 2 Puerto Rico 2 South Africa 2 Spain 2 Thailand 2 Turkey 2 Zimbabwe 2 11 Appendix Survey results: Insurance respondents... any, have resulted from these attempts? Prioritise controls based on risk assessments (% respondents) Much higher Higher No change Lower Much lower Don’t know Headcount 21 59 14 7 Time required 28 28 41 3 0 Control errors 11 25 61 4 Audit costs 3 17 31 31 3 14 59 3 14 Number of poor-quality decisions 7 17 Does your organisation regularly include risk evaluations as part of its financial processes? (%... responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper 12 LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com ... Economist Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry Preface Strengthening governance, risk and compliance in the insurance industry. .. layout and design Our thanks are due to all of the survey respondents and interviewees for their time and insights February 2009 Strengthening governance, risk and compliance in the insurance industry. .. Intelligence Unit Limited 2009 Strengthening governance, risk and compliance in the insurance industry I nsurance companies have long struggled to gain greater efficiency and transparency in their