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Adapting to the changingenvironment.Deloitte Central Europe Financial Services Industry Newsletter
October 2007
Financial Services Industry
Size matters: CEs biggest banks
Triggering the tax advantage
The shiting security paradigm
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Contacts Welcome
The fnancial services industry in Central Europe is constantly changing. The companies thatwill survive and even prosper are the ones that can adapt to the changing environment
and thrive in the new surroundings. Challenges and opportunities abound: Solvency II, risk
management, IFCs and M&A are just a ew o the many topics keeping executives awake at
night.
In this, the 4th issue o Deloitte Central Europes Financial Services Industry Newsletter, we
continue our ocus on these emerging issues aecting banks, insurance companies, asset
management companies and other fnancial services players in the region. We also give a
glimpse at the results o the frst Central European Top 500 companies ranking However, as
usual, we also have some interesting global perspectives, including the results o the 2007
Global Security Survey.
I you would like to know more about how Deloitte can help you be successul in your
business, please contact one o our FSI partners shown in the let column. For a copy o any
o our publications, please speak to your local FSI partner or browse our local internet sites
which can be ound at www.deloitte.com
Mike JenningsFinancial Services Industry Leader
Deloitte Central Europe
Albania, Kosovo
Santiago Pardo
Tel.: +40 21 2075 492
E-mail: [email protected]
Bulgaria
Sylvia Peneva
Tel.: +359 2 980 8500
E-mail: [email protected]
Croatia, Bosnia-Herzegovina,
Bosnia-Herzegovina Republic
o Srpska, Slovenia
Paul Trinder
Tel.: +385 1 2351 906
E-mail: [email protected]
Czech Republic
Mike Jennings
Tel.: +420 246 042 576
E-mal: [email protected]
Estonia, Latvia, Lithuania
Veiko Hintsov
Tel.: +372 640 6512
E-mail: [email protected]
Hungary
Andras FulopTel.: +36 1 428 6937
E-mail: [email protected]
Poland
Marcin Zdral
Tel.: +48 22 511 0619
E-mail: [email protected]
Romania, Moldova
Adrian Covacescu
Tel.: +40 21 2075 207
E-mail: [email protected]
Serbia, Montenegro, Macedonia
Miroslav Toncic
Tel.: +381 11 361 2524
E-mail: [email protected]
Slovakia
Zuzana Letkov
Tel.: +421 2 582 49 210
E-mail: [email protected]
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A landscape in evolution
While advising on the developmento International Financial Centres
(IFCs) over many years, we encounter
one particular persistent question: Is
there room or another IFC? Gener-
ally, we answer this with a counter
question: Do you think Paris should
move its fnancial services activity to
London, or perhaps the highly suc-
cessul centres o the Caymans and
the Bahamas should merge?
Behind our response is the thought
that, just as in every maturing in-dustry around the world, successul
strategies that are well-executed will
prevail, even under intense competi-
tion. In our view, there will always be
an opportunity to compete success-
ully, given an appropriate strategic
response. Deloittes latest thought
leadership on IFCs, A landscape in
evolution, attempts to explain why.
Over the past ew years there has been
a sea change in the intensity o competi-tion and speed o development in IFCs.
We may see another 40 or more centres
emerging in the next decade. However one
chooses to defne an IFC (see IFC or IFJ?),
there is clearly a very signifcant growth.
In addition, well-established centres are
constantly reinventing themselves through
improved capabilities and ocus.
A truly international basis of
competition is slowly emergingWe have observed an increasingly intense
international market rivalry emerging. The
enablers o this include:
Global consolidation o major fnancial
services institutions;
Global standardisation both rom im-
proved communication technologies and
the adoption o English as the dominant
business language; and
Greater mobility, both o labour (especially
good business, fnance and economics
graduates) and o capital.
Developing appropriatestrategies
The strategic vision must be brave,
tempered with reality
The essential questions or a country seeking
to build or enhance its fnancial jurisdiction
are: How should we develop these dimen-
sions o competition? And in which order?
Clearly, this depends upon the medium-to-
long-term vision and the startingpoint
(or assets) o the jurisdiction. Undoubtedly,such a vision must be brave and ambitious,
yet tempered with a great deal o reality
about how such a project can be realised
over the extended timescales. Experience
rom many other business liecycles tells us
that IFJs must aspire to be either regionally
dominant or niche in maturity, not stuck in
the middle.
Implementing the strategy
The key skill is change and pro-
gramme management
The ocus o this article is the development
o strategy. However, strategies cannot be
divorced rom their implementation. IFJs are
very large, complex and practical undertak-
ings which are ar harder to realise than
develop on paper.
The frst practical issue is winning agree-
ment and commitment to achieving the
long-term vision, and an understanding that
the time-to-maturity will be well beyond the
tenure o most o the key stakeholders and
investors. Building the appropriate govern-
ance and management models is imperative.
Here, small jurisdictions may have an advan-
tage o nimbleness and responsiveness.
To fnd out more about the uture or IFCs
and IFJs and what this could mean or your
business, download the publication www.
deloitte.cz in the Financial Services section.
IFCs are here to stay
IFC or IFJ?
The defnition o a fnancial centre is important because it determines how we think
about competition. We fnd the term IFC like oshore somewhat unhelpul in
that it connotes a single clustered, physical locality, with less ocus on those prerequi-
sites which orm the primary basis o competition; namely the political, legal, regulatory
and (to some extent) fscal dimensions o a fnancial jurisdiction. For this, we shall use
the term International Financial Jurisdiction (IFJ). This allows us to reer to both a large
geographically dispersed authority or to a restricted range o fnancial unctions as an
IFJ. Under this business defnition Dubai could compete with Poland, and British Virgin
Islands can compete with the whole o the United States, as o course they do. Also,
it encourages us to investigate intra-country competition such as between Beijing and
Shanghai, or London and Edinburgh. Finally, it allows us to use concepts o Cluster
Theory (e.g. around specifc fnancial skills), regional network eects (such as interna-
tionalisation o Central Securities Depositaries and Central Clearing Departments) ando the impact o local monopolies etc.
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Global fnancial services institutionscontinue to be under pressure to
outperorm their competitors across
a range o challenges: rom risk man-
agement to regulatory compliance;
rom customer relationship manage-
ment to talent retention; and rom
mergers and acquisitions to inorma-
tion technology. However very oten,
eective tax management is over-
looked as a way to boost perorm-
ance in each o these areas.
This new report rom Deloittes global FSI taxteam looks at several key areas o a global
fnancial services institutions business,
uncovers how tax can play a role in creating
competitive advantage in each area, and
suggest ways in which these global fnancial
services institutions can quickly Trigger the
Tax Advantage.
How improvements in tax reporting,
technology and risk management
can contribute to optimised
performance
For companies where tax is an integral part
o the organisation, a well thought-out tax
strategy and risk management ramework
creates value at all levels o the business. It
also ensures that tax payments and flings
happen according to a well-defned process.
For some organisations, however, tax can
be something that just happens where
returns are fled, payments are made and
planning is undertaken, all o which is
divorced rom the rest o the business.
How can technology help?
The eectiveness o any technology as a risk
management tool relies upon the quality
o its inputs. As such, the tax sensitivity
contained in, as well as the ability to link
with, existing fnancial systems is critical.
While tax sensitisation o accounting
numbers should be handled by the tax
trained, the fnancial systems can be
designed to organise accounting numbers
into categories that Tax can interpret. In this
way tax technology can be considered as
a bolt-on to the fnancial systems.
Why good tax reporting is critical tomaintaining customer trust
A new ocus
No longer in the dark corners o a fnancial
institution, operational taxes are now under
a bright spotlight. New tax regimes, stier
penalties or non-compliance, and increas-
ing risks to the fnancial and commercial
well-being o the company these changes
have increased the importance o operation-
al taxes and, hence, the attention being paid
them. What needs to be at the top o man-agements agenda? An integrated ocus.
How companies can use tax credits
to secure signicant savings on IT
and R&D investments
Planning makes perect
The dierences among R&D tax regimes can
work in a companys avor with planning.
For a company to receive maximum global
R&D tax incentives, planners must start with
a consideration o how such benefts canaect, and be aected by, the companys
oreign tax credit positions, its international
tax liabilities, and its transer pricing ar-
rangements.
Why tax considerations deserve
a place in the deal
Tax A key consideration o any M&A
transaction
During this increased period o M&A activity
it is worth remembering that Tax issues need
to be careully considered as part o eachtransaction, whether it is in structuring the
deal at the outset or in the post-merger
integration phase. The beneft that Tax can
bring covers both above the line, as well as
below the line items.
How successful tax management and
implementation of tax technology
can stop deciencies from sabotaging
your Sarbanes-Oxley compliance
Tax is the number one cause o material
weaknesses or US flers and there is a lot
to learn rom the experiences o those that
have received an adverse opinion.
Why international assignments arekey to retaining your top performers
A recent Deloitte Research report on
oshoring in the fnancial services industry
revealed that the majority o institutions
suer rom oshoring atigue ater three
years in operations.
Financial institutions must fnd ways to man-
age a delicate balancing act creating pro-
grams that satisy young managers desires
or variety in their careers, while still making
it possible or them to keep work and lie in
balance. This balance is particularly difcult
when it comes to any frm that has overseas
operations in which the presence o U.S.
workers is necessary.
Why nancial institutions need to
integrate tax reporting into their
IFRS approach
By now companies have realized that there
are ewer ways to reduce the reported tax
rate, other than by permanently reducingthe cash taxes payable. Deerral doesnt
work; strategies such as retaining profts
oshore or deerring capital gains may save
cash tax but also require deerred tax plan-
ning to reduce the rate.
Compliance and systems
Create teams to fnd ways o improving the
data collection and calculations by automat-
ing, as ar as practical, the tax reporting
process. Automation can help in many ways,
such as tracking and calculating tax on share
options, revaluations, derivatives, and profts
retained oshore.
Tax orecasting and eective tax rate
management
To orecast taxes payable and reported tax
charges and to deliver meaningul data in
real time requires an investment in systems
(or headcount) above and beyond simple
business tools and structures. Companies
need to ocus on their eective tax rate to
get a clear understanding o post-tax profts
and, hence, earnings per share.
You can fnd more tax issues and solutions
in the Financial Services section at www.
deloitte.com.
Triggering the tax advantage
Tax tactics or the Global Financial Services Industry
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For many years commentators have been
orecasting the arrival o European banking
mega mergers in some shape or orm. In
2005 Deloitte analysed the US mergers and
acquisition (M&A) experience and the Euro-
pean fnancial services market to identiy spe-
cifc M&A trends; these included the removal
o barriers and the imperatives o shareholder
value creation. We predicted that by 2010
M&A activity would indeed transorm the
European banking landscape.
According to a European Central Bank report
(Financial Integration, March 2007), rom
2000 to 2004 cross-border banking M&A
accounted or only 14% o all banking M&A
in the eurozone, but in 2005-2006 this
proportion increased to 38%, mainly due to
a ew large value transactions in 2005. The
report also identifed 33 banks with signif-
cant cross-border activities, which accounted
or more than hal o the eurozones banking
assets, and 16 o these banks were active in
at least hal o the eurozones countries.
Now in 2007, we can see how the increasing
number o actual and proposed transactions
combined with the more recent emergence
o Private Equity frms targeting the fnancial
services sector, is starting to change the Euro-
pean banking landscape. However, experi-
ence in other industries suggests the reality
o merger benefts is oten disappointing. It is
thereore even more critical or the manage-
ment o banks to identiy the major issues
that need to be addressed so that identifed
benefts are actually realised in transactions.
In this short pamphlet, we summarise our
view on the top 10 issues we believe are vital
or successul cross-border deals in banking,
we recap on our 2005 predictions in light o
the current European banking landscape in
2007, and we explore some o the realities
around achieving merger synergies.
Our conclusion on this matter is that an inte-
grated approach is needed, bringing together
all components o the transaction, so that
an operational plan is in place to help ensure
success rom Day 1.
To fnd out more about M&A in the banking
industry, download the report rom www.
deloitte.com or contact your Deloitte FSI
expert.
Integration is key
Mergers & Acquisitions in European Banking
10 key issues in the banking M&A
landscape
Investor attitude
Political and cultural barriers
Management structure and clear
accountability
Revenue benefts
Cost synergies
People
Technology integration
Tax pitalls and opportunities
Pensions
Regulatory, including capital
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Top of the pile
The banking industry keeps growing
Industry
Ranking
Full name Country Assets 2006
(mln Euro)
1 Orszgos Takarkpnztr s Kereskedelmi Bank Rt. Hungary 28 389,7
2 eskoslovensk obchodn banka, a. s. Czech Republic 27 725,1
3 esk spoitelna, a.s. Czech Republic 26 491,8
4 Powszechna Kasa Oszczdnoci Bank Polski S.A., GK Poland 26 430,7
5 Komern banka, a.s. Czech Republic 21 733,2
6 Hansapank AS Estonia 19 392,0
7 Bank Pekao S.A., GK Poland 17 671,7
8 Bank Przemysowo Handlowy S.A., GK Poland 16 902,6
9 Skupina Nova ljubljanska banka Slovenia 14 408,8
10 BANCA COMERCIALA ROMANA Romania 14 027,3
11 ING Bank lski S.A., GK Poland 12 650,5
12 BRE Bank S.A., GK Poland 11 048,9
13 ZAGREBAKA BANKA d.d. Croatia 9 552,4
14 Bank Handlowy S.A., GK Poland 9 394,1
15 Bank Zachodni WBK S.A., GK Poland 8 624,4
16 Slovensk sporitea Slovakia 8 616,8
17 Kereskedelmi s Hitelbank Rt. Hungary 8 612,1
18 BRD GROUP SOCIETE GENERALE Romania 8 287,8
19 PRIVREDNA BANKA ZAGREB d.d. Croatia 7 585,3
20 HVB Bank Czech Republic a.s. Czech Republic 7 525,4
Deloitte Central Europe recentlypublished the rst edition of
the CE Top 500 a ranking of
the 500 largest businesses in the
region. The ranking, the result
of intensive cooperation between
the Deloitte ofces across 18
countries, also included a separate
analysis for the banking and
insurance sectors.
Here we have provided a short
summary of the results, together
with an analysis by Andras Fulop,
a Financial Advisory partner in
Deloitte Hungary who focuses on
the FSI industry.
The Central European banking sectorhad another very strong year in 2006: the
top 50 banks total assets grew nearly
by 22% in EUR terms, just slightly below
the previous years fgure. The increase in
net proft was just as impressive, with an
annual increase o 19% and 34% in 2005
and 2006, respectively. Average return on
equity was slightly over 20% in both years,
which is signifcantly higher than the similar
Western European fgure.
OTP Bank became the largest bank in
Central Europe based on total assets. Thiscan in part be explained by the act that
OTP is the only Central European banking
group, thereore its results include those
o its subsidiaries; urthermore, in 2006
OTP made several acquisitions which also
boosted its fgures.
The ranking shows clearly that the six
largest banking groups account or more
than 50% o all large banks. The Raieisen
Group has the most banks in the Top 50,
but these banks are mainly in the lowerpart o the ranking, due to their predomi-
nantly greenfeld background. Meanwhile,
Erste Bank has our banks in the top 25, all
o which were acquired through privatiza-
tion. Other large groups include KBC rom
Belgium, and Unicredit and Intesa rom
Italy.
With one o the last big banking privatiza-
tions in Central Europe, when the control-
ling stake o BCR was sold to Erste Bank in
2006, the Central European banking sector
is nearly ully privatized and only our banksout o the regions top 50 are still control-
led by the state. These our are also coming
rom just two countries Poland and Slov-
enia, while in the regions other countries
all o the big players are in private hands
by now. Privatizations are mainly eected
through strategic sale only one o the
top 50 banks, OTP Bank, is listed without
strategic owner. On the other hand, only
a limited number o the banks were truly
greenfeld operations.
Top 20 banks
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Based on trends in the frst part o 2007,
growth is expected to continue in the
uture at double digits, although at a
slightly lower pace. The growth will be
owed to retail mortgage lending, as credit
market penetration in Central Europe is still
signifcantly lower than in Western Europe.
A urther shrinking in margins, increased
emphasis on ee income growth and en-
hanced cost efciency are also expected.
One should also note that at this stage, it is
hard to predict how the current subprime
stock market crisis will impact the Central
European banking markets. There is no
direct impact here, as the Central European
banks do not have or have very limited
direct exposure to these subprime securi-
ties. But on the other hand, there could
be several negative indirect impacts such
as potential increase in cost o fnancing,
increased deault rate in case o CHF and
EUR denominated loans through weaken-
ing o local currencies, lower valuation
levels o the ranked banks as well as their
investment portolios, etc.
Among the 50 biggest banks in terms o
revenue, the bulk (12) are Polish banks.
However, they dont top the rankings.
The situation is dierent when it comes
toinsurance companies, where PZU is
No.1 and hal o top 10 insurers are entities
based in Poland.
Industry
Ranking
Full name Country Gross Written
Premium 2006
(mln Euro)
1 Powszechny Zakad Ubezpiecze S.A. + Powszechny Zakad Ubezpiecze na ycie
S.A.
Poland 3 919,0
2 esk pojiovna a.s. Czech Republic 1 334,9
3 Kooperativa, pojiovna, a.s. Czech Republic 967,7
4 Zavarovalnica Triglav d.d. Slovenia 817,1
5 ALLIANZ Hungria Biztost Rt. Hungary 675,9
6 Towarzystwo Ubezpiecze na ycie Commercial Union S.A. + Commercial Union
Towarzystwo Ubezpiecze Oglnych
Poland 656,1
7 Towarzystwo Ubezpiecze Allianz ycie S.A.+Towarzystwo Ubezpiecze Allianz Polska
S.A.
Poland 653,4
8 Towarzystwo Ubezpiecze i Reasekuracji Warta S.A. + Towarzystwo Ubezpiecze na
ycie Warta
Poland 592,8
9 AEGON Towarzystwo Ubezpiecze na ycie S.A. Poland 473,5
10 GENERALI - PROVIDENCIA Biztost Zrtkren Mkd Rt. Hungary 468,6
Top 10 insurance companies
Criteria or the ranking
1. The data was collected in three categories: Companies, Banks and
Insurers.
2. The main category o ranking and the value which determine the
companys position in the ranking is revenues rom sale, assets and
gross written premiums respectively or Companies, Banks and Insurers.
3. The inormation was collected locally - preerably according to IFRS.
4. The ranking was composed o consolidated values (i the company
published consolidated fnancial statements).
5. The preerred source o data was audited fnancial statements, then
data provided to us by company and databases. I there was no
possibility o collecting the revenues or 2006, they were estimated or
assumed to be at the 2005 level.
Countries covered by the ranking
Poland, Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech
Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova,
Montenegro, Romania, Serbia, Slovakia, Slovenia, Ukraine
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While inormation security incidents continueto grab the attention o business executives,
ownership o the underlying problems is
still perceived to rest with IT, according to the
2007 edition o the Global Security Survey by
Deloitte Touche Tohmatsu (DTT). Less than
two thirds (63%) o respondents to DTTs
2007 Global Security Survey have an inorma-
tion security strategy. Only 10% o this years
respondents have their inormation security
led by business line leaders. These fndings
support an emerging security paradox: the
gap between awareness o the problem and
support or the solution.
The survey also revealed that the greatest
root cause o external breaches continues
to be the human actor: an organizations
employees, customers, third parties and busi-
ness partners.
The contradictory fndings in this years
survey highlight the security paradox fnancial
institutions are acing, says Petr Brich, Risk
Management Leader or Deloittes Finan-
cial Services practice in the Czech & Slovak
Republics. On the one hand, it is clearthat respondents have identifed the major
security issues and the necessary actions they
must take to improve security and privacy
practices. On the other hand many fnancial
institutions are alling behind when it comes
to taking action.
One o the elements most worrisome or
organizations when it comes to breaches is
customers. The DTT survey ound that the
top three breaches (those that were repeated
the greatest number o times) were viruses
and worms; e-mail attacks, e.g. spam; andphishing/pharming. All o these breaches are
perpetrated via the customer, e.g. customers
as unwitting providers o sensitive inorma-
tion and conduits into fnancial institutions.
But even though fnancial institutions are
directly aected by these types o breaches,
they are still reluctant to take responsibility
or the security o their customers comput-
ers, most likely because o the enormity o
such an undertaking. When asked whether
they should be held accountable or protect-
ing the computers o their customers whodo online business with them, two thirds o
respondents (66%) replied that they should
not.
In addition to breaches perpetrated throughthe customer channel, the DTT survey reveals
that a high number o repeated occurrences
o breaches can be attributed to employees:
both misconduct (intentional action) and er-
rors and omissions (unintentional action). An
overwhelming majority o respondents (91%)
are concerned about employees and cite the
human actor as the root cause or inorma-
tion security ailures (79%).
But while errors and omissions on the part o
employees are identifed as a major security
issue, almost a quarter (22%) o respondentsprovided no employee security training over
the past year and only one-third o respond-
ents (30%) say their sta is well skilled
with adequate competencies to respond to
security needs.
Despite these gaps, identifying
the problem is at least half
the battle and so nancial
institutions are denitely moving
in the right direction to closethese gaps, adds Petr Brich.
Security training and awareness,
along with access and identity
management of employees, clients
and suppliers, and data protection
are among organizations top
initiatives this year, as they ght
to keep pace with the ever-
changing threat landscape.
Additional key fndings o the survey:
E-mail attacks top the list o external secu-
rity breaches fnancial institutions experi-
enced over the past 12 months (57%).
Two-thirds (66%) o respondents do not
eel they should be accountable or pro-
tecting the computer o customers who
bank on-line.
Virtually all respondents (98%) indicate
increased security budgets, but 35% eelthat their investment in inormation secu-
rity is lagging behind business needs.
Shiting priorities and integration
problems were identifed as top reasons
or inormation security projects ailure
(48% and 32%, respectively).
How much some things change. In the 2003
security survey, the DTT GFSI Group wrote,
There seems to be little insightul data on
the state o either IT security or privacy in
fnancial institutions - or any other sector
or that matter - and there is almost no data
2007 Global Security Survey
The shiting security paradigm
Europe, Middle East and Arica (EMEA):
The EMEA region has the highest per-
centage o respondents (39%) among
all regions who eel they presently have
both the required skills and competen-cies to respond eectively and efciently
to current and oreseeable security re-
quirements. Additionally, the majority o
participants (82%) eel that security has
risen to the C-suite or board level, with
more than three-quarters (77%) believ-
ing they have both the commitment and
unding to address regulatory compli-
ance. With regards to security breaches,
the percentage o institutions in EMEA
that experienced security breaches both
internally (31%) and externally (71%) is
above the global averages o 30% and
65%, respectively.
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Regional highlight EMEA Global
FSIs who eel that security has risen to the C suite or board as a critical area o business 82% 81%
FSIs possessing a security strategy 61% 63%
FSIs whose inormation security strategy is led and embraced by line and unctional business leaders 10% 10%
FSIs who have incorporated application security and privacy as part o their sotware development liecycle 33% 32%
FSIs who eel they have both commitment and unding to address regulatory requirements 77% 73%
FSIs who eel that government driven security regulations are eective in improving security posture intheir industry
82% 86%
FSIs who have security linked to their IT security employees appraisals 44% 50%
FSIs who eel they presently have both the required skills and competencies to respond eectively and
efciently to oreseeable security requirements
39% 30%
FSIs whose employees have received at least one training and awareness session on security and privacy in
the last 12 months
82% 78%
FSIs who have an executive responsible or privacy 60% 66%
FSIs who have a program or managing privacy compliance 78% 70%
FSIs who have experienced repeated internal breaches over the last 12 months 31% 30%
FSIs who have experienced repeated external breaches in the last 12 months 71% 65%
that delivers a world-wide perspective.It is
an indication o the truly high visibility that
security and privacy has attained that this
statement is no longer the case.
How much some things stay the same. One
o the survey respondents to the 2003 se-
curity survey oered this statement, New
technologies and new business models are
causing us to blindly run ull speed toward
the unknown. And the hot breath o
threats and risk is on our necks at all times.
We are constantly under siege.This state-
ment is as true today as it was back then.
The everincreasing sophistication o security
breaches seems to know no bounds. The
industry has produced some great minds
- which have been used or us as well as
against us.
It has oten been said that, over the course
o a lietime, children are the source o
ones greatest joy and ones greatest con-cern. In a similar vein, this years respond-
ents might say the same o their people
(employees, customers, third parties and
business partners) - they are an organiza-
tions greatest asset yet its greatest worry.
The most requent breaches organizations
experienced were those perpetrated by
crooks against the customer. In addition,
a large number o organizations anticipate
breaches due to employees, both inten-
tional action (misconduct) and uninten-
tional action (errors and omissions). Even
though the majority o breaches are due
to mistakes and not malicious intent, they
have no less impact.
But mistakes are not without their use-
ulness. Sam Levenson, the American
humourist, once said, You must learn
rom the mistakes o others. You cant
possibly live long enough to make them
all yoursel.Humour aside, rom a security
and privacy perspective, the message is
clear: oten times, it takes misortune hap-
pening to others or us to learn what to do
to protect ourselves. You can be sure that
every time there is a major security disaster
reported in the press, many other organiza-
tions scramble to ensure that their systems
are not vulnerable in the same way.
Every year, this survey demonstrates the
progress in security that has been made
over the course o a year: the incidents o
viruses/worms, insider raud, and the leak-
age o customer data have all allen. We
know this doesnt mean that the criminals
are going away - theyre just thinking up
something new - but the statistic represents
major progress nonetheless. And much
o the progress has been as the result o
proactive - rather than reactive - measures.
Those o us in the security and privacy arena
know that the answer to the question, Are
we there yet? is that we may never be
there - but we continue to work towards
making sure that the journey is as sae and
secure as possible.
For urther inormation on the results o the
survey you can download it rom Financial
services section at www.deloitte.com.
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Although the Solvency II project is still
in the early stages, QIS3 (Quantitative
Impact Study) is entering into a conclu-
sive/crucial phase. The outcome o the
study will aect the amount o capital
an insurance company must hold as
protection against potential risk.
In the ollowing paragraphs you can fnd
some o the key current developments in
the Solvency II project.
Quantitative impact studies
QIS3
The insurance companies were to submit
the completed spreadsheets to their local
supervisor by 29 June 2007
The results should be published in No-
vember 2007
Final advice on Solvency Capital Re-
quirement (SCR) and Minimum Capital
Requirement (MCR) to be presented by
spring 2008
QIS4
To be conducted in 2008 (probably be-
tween April and July)
Specifcation should be based on the
Framework Directive and should include
any lessons learnt rom QIS3
EC (European Commission) wants CEIOPS
(Comitee o European Insurance and Oc-
cupational Pensions) to deliver drat QIS4
specifcation by 20 December 2007
Problematic areas arising rom QIS3
Models
Lack o internal models
Signifcant eort oten necessary to
convert the existing models to adhere to
QIS3 rules
The problematic areas included
- Modelling o shocks on assets
- Modelling o reinsurance
- Modelling o interactions among assets
and liabilities in shock scenarios
- Determining run-o pattern (proxies)
- Split o liabilities into dierent categories
Options and guarantees (O&G)
O&G were not properly valued by most
companies
O&G were valued using very simple as-
sumptions/models in the majority o cases
In some cases, O&G assumed to be zero
Systems
Some o the current systems do not hold
enough inormation to perorm proper
QIS3 calculation
The lack o inormation identifed on both
asset and liability sides
Reporting procedures
Current procedures not ready or inorma-
tion required by QIS3
This relates to ability to fll individual inor-
mation and also to qualitative questions
The European Commission
The fnal drat o the Solvency II Directive was
published on 10 July 2007. All 13 currently
existing European Insurance Directives will be
combined into a single new one. The most
important innovation will be the risk-based
approach o Solvency II. The drat sets out
essential principles or the uture regime.
The development and testing o the Euro-
pean Standard Formula is very important or
the success o the whole project. Although
QIS3 meant big progress in this area, there
is still more calibration and testing needed
to set the Formula right. It is also necessary
to come up with suitable simplifcations or
small and medium-sized insurers.
Requirements o European Commission
to CEIOPS
Application o the proportionality principle
in the calculation o group solvency
Ideas to acilitate the eective supervi-
sion o groups and the supervision o the
group support in particular
Practical aspects to achieve consistent and
competitive equality across the EU concern-ing ull and partial internal models, govern-
ance requirements, systematic supervisory
reporting and public disclosure requirements
and the use o capital add-ons
Indicate where the line between level 2
implementing measures and level 3 guid-
ance should be
Core issues rom the Solvency II Direc-
tive drat
Pension unds are not included
The parts concerning the capital add-ons
are very general (concrete approaches to be
set by urther implementation measures)
The group supervisor will be assigned to
the (re)insurance group, (concrete ap-
proaches to be set by urther implementa-
tion measures)
The calculation o MCR will be set accord-
ing to the results o QIS3. It will have to
be calculated quarterly
Own Risk and Solvency Assessments
to be carried out by all (re)insurance
undertakings as an integral part o their
business strategy - a regular practice o
assessing their overall solvency needs with
a view to their specifc risk profle
Supervisory authorities have the power to
require an (re)insurance undertaking to
develop a partial or ull internal model in
the event that the SCR standard ormula
does not accurately capture the risk pro-
fle o that undertaking
Applications or internal models must be
approved or rejected within 6 months
rom receipt
Five tests to be met beore approval
internal model Use test; Statistical quality
standards; Calibration standards; Validation
standards and Documentation standards
All insurers must have an actuarial and
a risk management unction (access to the
required skills)
Solvency II
Changing behaviours
Tentative timetable or the Solvency II project
May 2008 Final advice rom CEIOPS on the frst two issues
2008 Final negotiations and agreement on the Framework Directive (beore the
next elections or the European Parliament)
October 2009 Fully consulted advice rom CEIOPS
2nd hal 2010 Adoption o the implementing measures and fnalisation o the level 3
supervisory guidance
2nd hal 2012 Start o the new regime in EU
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Hot Issues
Our Financial Services Industry experts produce a wide range o thought leadership materials covering key issues or fnancial institutions.Below you can fnd selected materials that have been published in recent weeks.
More inormation on our recent FSI publications can be ound within our FSI section at www.deloitte.com.
Financial Services in 2010: Hallmarks o
success
The worldwide market or fnancial services
is evolving rapidly, and is likely to look very
dierent by the year 2010. This study rom
Deloitte Research identifes major market
drivers and operational challenges thatfnancial institutions will likely ace over the
next our years and pin-points the strategies
and practices recommended to create the
Hallmarks o Success.
Reversing the charges: mobile payments
at point o sale
Deloittes latest research suggests that the
substantial investment in mobile POS pay-
ments in the UK is misjudged, and there is
not a compelling case or banks or mobile
operators to invest in this new technology.Deloittes experts suggest alternative direc-
tions or mobile payment technology.
Lie insurance product innovation: a sure
path to growth
New products are one o the critical growth
strategies o most lie insurance companies.
A recent study o top lie insurers by Deloitte
revealed that the stock market rewards com-
panies that grow organically, especially those
who consistently develop innovative products,
while leaving unrewarded those insurers that
grow principally through mergers and acquisi-
tions. But how can your business develop
these new products?
The missing link: leveraging talent to
drive customer loyalty
In an era o soaring customer acquisition
costs and spiraling attrition, most retail banks
recognize the benefts o expanding share o
wallet by encouraging greater loyalty amongtheir existing customers. In recent years, many
retail banks have invested heavily in initiatives
designed to increase customer satisaction and deliver a unique ex-
perience. In most cases, however, these eorts have not borne ruit
- and noticeable gains in customer loyalty have remained elusive.
Why? To a great extent, retail banks have overlooked the linchpin o
the customer relationship - their customer-acing employees. These
employees oten remain an underutilized asset or growth, but in
this overview rom Deloitte, we explain how you can better utilise
these critical contact points with your customers.
-
7/27/2019 Adopting to the Changing Environment 1
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