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Risk-adjusted operating model: Transformation strategy for insurers

Read how the importance of risk management has increased for insurers and how a risk-adjusted operating model can help transform strategy for insurers.

Overview

Today, insurers are grappling with external challenges posed by a relatively volatile economic environment and the increased frequency of catastrophic events. These challenges have, in turn, increased the internal pressures within some organizations to better manage costs and possibly increase operational efficiency.

Globalization has increased the exposure of insurers to some risks because of adverse natural events across geographies and industries. On a worldwide level, the insured catastrophe losses totaled USD65 billion in 2012, well above the USD29 billion inflation-adjusted average of the last 30 years, revealing unexpected losses and unforeseen risk accumulation across global supply chains.

A survey of insurance equity analysts commissioned by Accenture in 2012 indicated that, while the challenges facing many insurers worldwide are similar, their relative importance varies. Analysts believe that investment volatility (71 percent) and new regulations and reform (52 percent) are the biggest threats to North American companies. For European companies, regulations come first (61 percent) and investment volatility second (57 percent).

Background

As a result of the financial crisis, the importance of risk management has increased and, today, risk management has visibility at the board level.

Firms understand the importance of risk management; the chief risk officer is often part of the executive leadership team and is typically involved in key business decisions.

The Accenture 2013 Global Risk Management Study identified a trend toward integration of risk into the strategic process and into areas outside the traditional scope of risk management, such as product development and pricing. This, we believe, can enhance the overall quality of decision-making.

Among insurers surveyed, the study revealed increased integration of risk management into core insurance processes. While insurers’ risk management and underwriting functions report a high degree of integration, many insurers are still in the process of integrating risk within their product development and innovation processes.

Key Findings

The large programs in which insurers have invested to meet regulatory requirements can form the foundation blocks for an operating model transformation. Such a transformation can help drive down costs and generate value for the organization. The risk and finance functions are two of the key catalysts for such transformations, which can be typically implemented at multiple levels within each of the capabilities listed below:

  • Strategy and vision: Risk management processes can be integrated into strategic planning. Using a clear definition of risk appetite can support risk-adjusted decision-making.

  • Process (re-)design and integration: Redesigning core insurance processes can help spur consideration and use of relevant risk techniques. The use of industry standard tools for process analysis and design can help insurers identify and possibly reduce duplicative processes and activities that add less value.

  • Refinement of IT framework, methods and tools: Industry-specific reference architectures can help firms identify gaps, derive solution options and enhance existing capabilities. Using a comprehensive and common IT landscape for multiple functions tends to increase synergy and may reduce long-term total cost of ownership

  • Use of centralized, managed services solutions: To derive economies of scale and drive down operating costs, best-of-breed managed services solutions with strong analytic models may be considered if they conform to the firm’s overall strategy and help drive down costs.

Recommendations

A risk-adjusted operating model such as the one developed by Accenture can help firms integrate risk management into core operations, capital management and business processes. This, in turn, can help insurers maximize enterprise value by allowing their management to invest in projects or business units that are profitable after taking into account the cost of needed capital. The risk-adjusted approach discussed can enable “de-risking” by reducing some of the firm’s exposure to high risk products and/or portfolios in favor of products/portfolios with more favorable risk/return metrics.

Authors

Markus Salchegger is a managing director, responsible for Risk Management insurance in Austria, Germany and Switzerland. Salchegger holds a PhD in Mathematics, and over the past 17 years, he has used his extensive experience in insurance, reinsurance, banking, asset management and software development to analyze, design and deploy solutions for risk management and financial service applications that help clients become high performance businesses.

Gerald R. Roop is a managing director working with the Accenture insurance practice in North America. Roop has extensive industry and consulting experience in financial services, primarily insurance and reinsurance, as well as brokerage, banking and capital markets. He has led initiatives to establish finance strategy, target operating models, talent management capabilities, in addition to insurance risk management initiatives focused on risk processes, technology and measurement, and the integration of core insurance capabilities.

Prasanna Varadan is a senior manager with the Risk Management group in Chennai, India. 

Varadan has more than 12 years of consulting experience in financial services and risk management. He has worked with global and regional financial service firms across Africa, Asia Pacific, Europe and North America to transform their businesses and risk capabilities. His specialized experience in risk management, regulatory compliance, liquidity risk and operating model strategy helps Accenture create differentiated, industry specific offerings to help clients become high-performance businesses.

Daniel Kimmerle is a senior manager with the Risk Management group, based in Munich. Kimmerle uses his extensive experience in risk management and compliance to support insurers and reinsurers in analyzing, designing and implementing their risk management solutions and helping them comply with regulatory requirements and become high performance businesses.

Mauro Montesano is a consultant with the Risk Management group. Based in Milan, Montesano is primarily focused on supporting insurance firms, and in particular Solvency II and risk management related projects and assignments.

Industry & topics highlighted

Financial Services