Skip to Main Content
Access your saved content
Asset management has long been one of the key contributors to insurers’ economic returns to clients and stockholders—and thus a major lever of high performance. However, recent financial turmoil and a slew of new regulations have put pressure on the sustainability and profitability of insurers’ investment portfolios. Based on its past experience and understanding of both risk management and insurance, Accenture offers important insights into better asset classification in order to optimize asset management.
To define an optimal asset allocation and management framework requires striking the right balance between different and sometimes conflicting priorities and constraints related to profitability, capital requirements, and short-term versus long-term investments. Insurers are able to manage risk better when they can track the risk exposure of their asset lines in detail based on a deeper and more comprehensive classification of each.
Asset classification can also help insurers maintain a balance in terms of the diversification of asset classes based on the firm's risk appetite and invested returns. This can help insurers focus control on the main risk drivers.
New and existing regulations impose their own risk framework. For example, with respect to Solvency II, European insurers using the standard formula to calculate their capital requirements are coping with a framework in which market risk is calculated by applying pre-calibrated regulatory shocks to each asset class. These shocks can vary according to each asset class’s return and volatility. They are then aggregated based on a pre-defined correlation matrix.
Where there is insufficient information on asset classification, conservative-level shocks are applied, leading to a potential increase in capital requirements. Therefore, an insurer’s ability to establish and maintain a proper asset classification is one of the key components in managing capital requirements while optimizing the value extracted from investments made.
Accurate asset classification is no longer merely desirable; it is arguably one of the pre-requisites for managing a portfolio in a sustainable manner.
Accenture has identified general best practices in asset classification, such as:
Develop a classification framework designed from a regulatory perspective, for instance with regards to Solvency II requirements introduced by the European Insurance and Occupational Pensions Authority (EIOPA) for the reporting templates. It is possible for some insurers to adapt the classification framework to reflect actual risk exposures through their models, thus ideally optimizing their own fund requirements.
Map the asset portfolio to this classification framework to help ensure:
Define the governance and process (including control points) as a means to maintain the asset classification.
In addition to producing reports under standard norms such as International Finance Reporting Standards and Local Generally Accepted Accounting Practices, insurers are also required to conduct reporting under the Solvency II norm. The reconciliation between standard and Solvency II norms must be ensured. A great challenge for insurers is to manage their assets’ data for modeling calculation and reporting.
Once a framework is established, asset classification calls for insurers to adopt a dedicated governance structure so that sustainable management may be implemented.
Steps to implementing a governance structure include:
Design and implement data management roles and responsibilities for both internal and external data. At the business level, this may be a quality officer, owner and custodian; in IT, it may include a steward and an architect.
Clearly establish the relationship between these functions and formalize them in a dedicated charter (internal) or contract and/or service level agreement (external).
Confirm that adjustments to the asset classification process are validated by the finance or operations committee.
Data quality is a vital element of asset classification, and to ensure it we recommend that asset classification be implemented within a data warehouse. We further recommend that insurers implement the “unique storage” rule to ensure consistency and coherence across IT systems. The IT tools implemented should provide the following functionalities:
Collect data with different features including multiple referential norms and data management features.
Align the data collection process with the reporting calendar constraints.
Manage important data flows and allow an efficient data treatment.
At the group level, manage access to the platform with the appropriate security.
Specify the data framework and any data-enhancement needs.
Develop business views and a risk management perspective.
Eric Jeanne is a managing director-Risk Management. He specializes in risk management and finance for the insurance industry, with a focus on enterprise risk management framework, Solvency II and risk and finance architecture. Jeanne has been with Accenture for more than 15 years, leading large transformation projects at major insurance and reinsurance companies, helping clients in their efforts to transform their risk and finance capabilities and processes. He is based in Paris.
Aude Maisondieu is a senior manager -Risk Management. Specializing in core insurance business process re-engineering, Maisondieu supports clients in developing and implementing Solvency II programs with a focus on defining risk and finance operating models, including organizational architecture and processes. She is based in Paris.
The authors would like to thank Accenture employee Olivier Godet for his contribution to this publication.
October 7, 2013
Skip Footer Links