The insurance industry is facing a new reality | KPMG | CA

The insurance industry is facing a new reality

The insurance industry is facing a new reality

ACs and management need to face it together.

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The insurance industry is facing a new reality

As much as the financial services industry has seen broad change in recent years, changes specific to the insurance sector are now having large-scale impacts. More demanding customers, interest rates staying lower for longer, cyber security, ORSA regulation, accounting change, international capital standards: in virtually all areas of operation—and as a result, of strategy—Canadian insurers are looking at an expanding agenda of current and future issues and challenges. As trends shift and new standards and regulations are rolled out, active cooperation between audit committees (ACs) and management will be required to ensure not only basic compliance, but that related processes and methodologies are directly integrated into the organization’s operational and strategic activities.

ORSA exemplifies expanding insurer challenges

Consider ORSA (Own Risk and Solvency Assessment)—a regulation designed to help companies assess and document risk and related capital requirements. It’s changing the way insurers look at capital adequacy and brings with it a number of operational and integration challenges. Canadian ORSA came into effect in 2014, with many insurers making their first filing in December 2014. Most insurers took the process in their stride, but as might be expected of a first incarnation, it was a “one-size-fits-all” kind of approach for many, with a compliance focus. Going forward, individual companies will have to refine their approach and align it with strategic priorities. For example, how do you ingrain ORSA processes and methodologies—such as stress testing, for instance—into day-to-day decisions like new product design, pricing, investment strategy, reinsurance buying and M&A activity, as well as bring it all together in strategic planning and performance reporting?

“Lean” in the audit

To drive profits in today’s economy and regulatory environment, insurers need to trim the fat and become more efficient. At the same time, understanding how your costs affect capital requirements is part of the ORSA process. At KPMG, we are finding that incorporating a Lean approach into our audits can yield insights and opportunities in both areas, helping our clients improve their cost base, sustain profits and more fully understand how and where costs—for example, the unit cost of servicing a policy—can affect capital.

ORSA will be a continuous, evolving process that may involve major steps such as reassessing capital allocation, refining capital models or redefining risk appetite. The point is, however, that—as critical as it is—ORSA is only one of many matters at hand. Rising customer expectations of value for money, ease of access and fair treatment, accounting change and cyber security aren’t going away. In this milieu, it’s critical not only that the AC is heavily involved and working closely with management on multiple fronts, but that both are asking key questions and defining mutual expectations. For example:

Management should ask:

  • Did producing the ORSA challenge our stated risk appetite?
  • Are we satisfied our stated risk appetite reflects how we actually run the business and make decisions in light of our ORSA results?
  • How are we analyzing the current environment to identify emerging risks?
  • Are we taking the appropriate steps to address the most pressing current trends, such as cyber security and fair treatment of customers?
  • In terms of risk and compliance, what’s the next “cyber security”?
  • Are we using all the tools at hand to improve decision making and enhance the business for customers and investors?
  • With new regulations, risks and focus, how do we best align management information to report on the changing world?
  • Is our conduct risk framework appropriate to identify, manage and mitigate market conduct risk and treat our customers fairly?
  • What is our implementation plan for IFRS changes in 2017, 2018 and thereafter for new standards dealing with revenue, financial instruments and insurance contracts? What does this mean for our systems and how we report our results?

Leveraging the potential of data and analytics

ORSA deals with emerging risks, both internal and external. Despite a clear need to find ways to actively deal with such risks, according to recent KPMG research, “just 29 percent of respondents say their company uses prescriptive data analytics capabilities” asking ‘how do we make things happen?’ rather than simply asking ‘what happened?’. By using prescriptive analytical capabilities, insurers can go beyond predicting potential future outcomes to actually driving strategic change. [1]

ACs should ask:

  • Is ORSA truly embedded into all processes and decisions, such as product design and pricing?
  • How aligned are our annual DCAT stresses with the stresses defined in ORSA?
  • Who owns ORSA—the risk function, actuarial or a combination?
  • Do we have a regular, streamlined process for reflecting updates on business developments in our ORSA as well as regulatory changes?
  • Reporting requirements are changing in multiple areas—are we on the lookout for ways this may impact the business?
  • Is management information adapting to the changes or are “bolt-on” workarounds making reporting even more cumbersome?
  • Are we receiving the right information on conduct risk considering the scale and scope of our operations, which may span multiple jurisdictions?
  • Have we aligned management’s long-term compensation with the changing environment of risk and regulatory requirements and changing financial statement drivers under IFRS?

Cooperate and integrate

ACs have to keep asking the right questions to stay in tune with ORSA, IFRS impacts and more. Guiding the business through the current economy—with lower profit margins and changing customer demands—requires new thinking, thinking that clearly falls outside the box and brings new technologies and methodologies to bear to address complex inter-relationships in a changing environment where new risks do not emerge in a vacuum. With so much on the table, ACs and management need to work together to achieve the best outcomes possible for customers and investors. Moreover, they need to ensure they’re leveraging all the tools available—for example, Lean and data & analytics—to effectively manage the new insurance reality.

Foot notes

1. KPMG. Transforming Insurance: securing competitive advantage. (2014).
Accessed at Transforming Insurance: securing competitive advantage [PDF 2.62 MB] on April 6, 2015.

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