Tag Archives: Ernst & Young

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5 Property/Casualty Insurer Goals for 2012

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Ernst & Young offers its advice to insurers that want to succeed in the year ahead.

Execute flexible approaches to manage uncertain conditions. To implement fluid strategies in an environment of multiple uncertainties, an insurer’s operational capabilities, infrastructure and corporate culture must support flexible, rapid and well-governed decision-making, thereby assuring agile performance with accountability. Diligent monitoring of changes in loss exposures and loss development drivers will guide flexible adjustments to risk management and risk pricing.

Anticipate, understand and address the impact of prospective regulations. Insurers must assess the impact of new regulations and accounting changes prior to implementation. They should consider enhancing the sophistication, articulation and deployment of their risk management standards and related systems, as compared to their current regulatory and reporting environments.  E&Y states that those insurers who fail to understand the full impact of regulations and new accounting standards may lose competitive advantage.

Comprehend and act upon changing insurance buying behaviors. Gaining a clear understanding of the customer will improve the chances of marketing success, notes E&Y. The buying behaviors and risk profiles of tomorrow’s customers will likely bear little resemblance to those today. Identifying, assessing and capitalizing on the characteristics of tomorrow’s customers underscores the need to tailor products, services and distribution channels to their specialized needs, notes the report.

Increase investments in core systems to bolster growth and profitability.  Insurers face mounting pressures to modernize core insurance systems such as claims, policy administration, underwriting and billing. Competitors have set the stage for this need for improvement, along with heightened customer expectations and, above all, increasing costs to maintain and upgrade systems. “Faced with limited investment alternatives yielding an attractive return, insurers are investing in themselves to position their operations for growth and improved profitability,” notes the firm.

Apply business analytics to address difficult top-line growth conditions. E&Y states that an uncertain economic environment will force insurers to apply business analytics across the value chain can glean deeper information on customer markets, underwriting segment profitability and claims management. Insights gained from analytics can then guide both strategy development and improved decision making, notes the firm.

Risk Management in the News

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Some days there are a plethora of risk management topics in the news, other days, not so much. Today we are in luck as I’ve come across quite a few risk management-related news stories that I hope you find interesting.

As risk management continues to evolve, we will continue to see compelling news articles focusing the various ideologies encompassing the discipline. More discourse regarding risk management means more thought about the topic and, hopefully, more real-world implementation.

Q&A: The Impact of Basel III

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Banks have feared the impending Basel III reforms for some time now. We have covered the topic in the past, both on the Monitor (the most recent Basel III-related post here) and in Risk Management (our April 2010 issue).

Starting tomorrow, regulators will come together for a two-day meeting of the Basel Committee on Banking Supervision. The purpose of the meeting is to come to an agreement on liquidity and the quality of capital to fill gaps in an overhaul of rules known as Basel III. Earlier this month, the G-20 endorsed the Basel reforms.

To get a bit of insight on the matter and how the reforms will affect insurers, I contacted Adam Girling, principal at the Financial Services Office of Ernst & Young, with a few questions on the topic.

How will the largest global investment banks deal with the impact of Basel reforms?

Adam Girling: One of the most significant impacts of the new Basel reforms is the substantial increase in capital requirements for trading book exposures, which are those positions held on a short-term basis with the intent to trade. The Basel Committee Quantitative Impact Study (QIS) and industry estimates suggest that risk-weighted assets for many trading portfolios will rise under the new requirements by three to four times on average, and potentially more for some portfolios. Particularly hard hit are securitization exposures. The global banking organizations with sizeable trading portfolios are looking at where their capital requirements are increasing most and whether they need to bring capital requirements down by hedging or unwinding positions — although liquidity of positions remains an issue. Coupled with the analysis of changing capital requirements are new Basel III leverage and liquidity coverage standards, as well as industry reforms around over-the-counter (OTC) derivatives and proprietary trading. So institutions are reviewing their business strategies and considering which businesses to exit stay the course or grow given the combined impact of changing market dynamics and new regulatory constraints.

Do you think economic growth will be hampered by Basel III bank capital standards?

AG: This is a profound question and there is certainly a divergence of views. For example, the Institute of International Finance (IIF) analysis suggests a potentially large impact, while the Basel Committee itself projects a quite limited impact. Theoretically, the extended implementation period should provide an opportunity to identify potential unintended consequences and an opportunity to make adjustments as, and if, necessary. The biggest risks are likely in the transition phase. The Basel committee has calculated that with the long transition periods retained earnings can boost capital ratios sufficiently, but the industry may set expectations for banks to meet the new standards sooner. If this is the case, banks will either need to raise extra capital or will need to reduce the risk in their balance sheets — potentially via changing their lending profiles to maintain an acceptable rate of return on equity.

How will the Basel reforms affect insurers?

AG: Basel II applies to banking organizations and Basel III does not propose to change those subject to the risk-based capital standards.  In the US, Basel II has, to date, only applied to the largest and most internationally active banking companies on a consolidated basis. And to my knowledge, none of these institutions have a top-tier parent that is an insurance company. If any insurance companies were deemed systemically significant under the Dodd-Frank Wall Street Reform and Consumer Protection Act, it is quite possible that the enhanced capital and liquidity requirements to which they would be subject would incorporate Basel III. In Europe, however, Solvency II is enhancing risk-based capital for insurers using a three pillar framework similar to Basel II.

Ernst & Young’s Global Information Security Survey

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Last week, I attended the Ernst & Young media roundtable to hear the results of its 2010 Global Information Security Survey (GISS). The survey includes responses from participants in 1,598 organizations in 56 countries across all major industries.

With the increase in the use of external service providers and the adoption of new technologies such as cloud computing, social networking and Web 2.0, companies are increasingly exposed to data breach threats. In fact, 60% of respondents perceived an increase in the level of risk they face due to the use of social networking, cloud computing and personal devices in the enterprise. And according to the survey, companies are taking a proactive stance as 46% indicated that their annual investment in information security is increasing. Though IT professionals are trying, not all are succeeding in keeping up with new tech threats.

“I’ve never seen this kind of shift in IT before,” said Jose Granado, the America’s practice leader for information security services within Ernst & Young. “Security professionals are trying to keep up with the pace, but aren’t really doing a great job. The have limited resources and a limited budget.”

A concern for IT professionals is mobile computing. Demands of the mobile workforce are driving changes to the way organizations support and protect the flow of information. In fact, 53% of respondents indicated that increased workforce mobility is a significant or considerable challenge to effectively delivering their information security initiatives. Aside from investing more on data loss prevention technologies, 39% of respondents are making policy adjustments to address the potential new or increased risks.

“You have to implement realistic policies,” said Chip Tsantes, principal within the financial services division of Ernst & Young. “They need to be liveable and workable, or else people will go around them. You can’t simply ban things.”

Another major concern for IT pros is the gaining popularity of cloud computing. Both Granado and Tsantes were shocked to learn that 45% of respondents (primarily those on the non-financial services side) are currently using, evaluating or are planning to use cloud computing services within the next 12 months.

“From the standpoint of a traditional IT security professional, endorsing or supporting a cloud environment is counter-intuitive,” said Granado. “How do I know where my data is and how do I know it is protected?”

So how do companies increase their confidence in cloud computing? According to the survey, 85% say that external certification would increase their trust.

So I asked Granado and Tsantes if they could tell me when they believed there would be a universal set of standards for cloud computing providers. Granado feels there is a two-to-three year timeline in regards to having something solidified. He says businesses are going to drive it; If businesses continue to push, “cloud providers would have to follow.” With more and more sensitive data calling the cloud home, let’s hope Granada is being conservative with his estimate.

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