Managing business performance in turbulent times XII Yalta International Financial Forum George...

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


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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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



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


Managing business performance in turbulent times

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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


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


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Investment management


• 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


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


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Where we can help you: Towers Watson Offices

In addition, through a global network of in-country experts we are able to provide compensation, benefit and employment practices for over 100 countries


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How we can help youHelping organizations improve performance through effective people, risk and financial management

Risk and Financial Services

• Insurance Consulting

• Investment Services

• Reinsurance Brokerage

• Financial Modeling Software

• Risk Management

Talent and Rewards

• Executive Compensation

• Talent Management

• Rewards

• Communication and Change Management

• Employee Surveys

• Global Data Services

Benefits

• Retirement

• Health and Group Benefits

• Technology and Administration Solutions

• International Consulting

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New YorkPhiladelphia

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ChicagoSan Francisco

Los Angeles

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We now have people in Atlanta and Denver too


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Our expertise

Risk and Financial Services

• Insurance Consulting

• Investment Services

• Reinsurance Brokerage

• Financial Modeling Software

• Risk Management

Talent and Rewards

• Executive Compensation

• Talent Management

• Rewards

• Communication and Change Management

• Employee Surveys

• Global Data Services

Benefits

• Retirement

• Health and Group Benefits

• Technology and Administration Solutions

• International Consulting

Mergers and Acquisitions:

From target evaluation to integration implementation


THANK YOU FOR YOUR ATTENTION!

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