Insurance Insights 2007
InsuranceInsights2007New issues andstrategies in the globalinsurance industryFINANCIAL SERVICES 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
Insurance Insights 2007 1Insurance Insights 2007New issues andstrategies in the globalinsurance industry 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
2 Insurance InsightsReport April20072007Contents12IndustryintroductionGrowth and businessdevelopment8Insurance companies look backon a successful yearThe results of the top global insurancecompanies reported in February andMarch show that profitability increasedacross the board on the back of risingequity markets, hardening of the ratesfor non-life business, growing demandfor life products and the welcomeabsence of the catastrophes we saw in2005. But there are challenges ahead.It is not clear where growth in non-lifecan come from, other than furtherconsolidation. Capital managementis increasingly important, driven bychanges in reporting and regulatorystandards, and insurers face pressureto improve efficiency.14Global insurance industry setfor resurgence in M&AThe past decade has seen a strong trendtowards consolidation in the insuranceindustry. Merger and Acquisition (M&A)activity has been high, due to rising stockmarkets, declining interest rates, industryderegulation and increased globalization.22Rapid change in the Indianinsurance sectorDriven in part by market liberalization,in part by the rapidly-growing Indianeconomy as a whole, the Indianinsurance sector is evolving rapidly. Thepotential has not gone unexploited byforeign investors. But success dependson developing a winning businessproposition, finding the right partner andon effectively navigating the regulatoryand approvals framework.24Islamic insurance: the growthof TakafulAlongside the growth of Islamicbanking, Takaful, or Sharia’a compliantinsurance, has experienced rapidgrowth over the last 10 years. 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
InsuranceInsuranceReportInsightsApril 2007 3345Efficiency and costmanagementReporting and regulationRisk and capitalmanagement30Global structures for insurancegroups – what does the future hold?Bermuda’s growth as an insurancemarket and the influx of new capitalfollowing WTC and Katrina mean that ithas increasingly been seen as a holdinglocation for international insuranceoperations. Established groups such asAce and XL Capital have been followedby a number of more recently formedgroups who have put their head officeand primary capital base in Bermudaand insurance or reinsurance operationsin the major markets around the world.This trend, together with recentdevelopments in the EU, has promptedother insurance groups based in themajor onshore centers to ask thequestion whether they should belooking afresh at the way they organizetheir international structures.40U.S. insurance industry faces majoraccounting challengesThe U.S. insurance industry facesa number of current accountingchallenges that threaten to stretchboth systems and resources.56What’s in the regulatory cookingpot? A comparison of the U.S. andEU solvency systems and controlThe time may well be right for theinsurance industry to engage in adebate about the merits of a singleglobal standard for insurance regulationof risk and capital adequacy.34Finance of the future: towardsa target operating modelCreating an explicit target operatingmodel for the finance function is avaluable foundation for articulating andimplementing a successful changeprogram – and for improving the qualityand strategic value of the whole financeoperation.42Financial reporting for insurance:significant uncertainties remainOver the next few years, the financialreporting regime for insurers willchange significantly. Major initiativesincluding IFRS Phase II, Solvency IIand further development of EuropeanEmbedded Value will mandate changesin the way insurance companies reporttheir results and, in many cases, impactfurther on underlying systems andmanagement information. But as yet,there remains significant uncertaintyover how these changes will play out.How should insurers respond?62A guide to model risk and controlWith many insurance companies relyingon models in a wide variety of businessareas, the overall quality of these toolsand the accuracy of their underlyingassumptions are critically important.Board members and senior executivesneed to understand the risks theirorganizations face when they usesuch models and take steps to managethem appropriately.50Quantifying uncertainty intechnical reservesGreater attention than ever is being paidby regulators and other stakeholdersto uncertainties in technical reserves.Insurance companies are developinghighly sophisticated models to try toimprove the quality of reserve estimates.But, the real issue concerns the clarityabout how reserve estimates arearrived at and communication aboutthe levels of risk inherent in anyparticular estimate. 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
4 Insurance Insights 2007ForewordInsurance should be very simple – you pay a premium to cover a risk,or you put some money aside for the future. From the point of viewof the consumer, nothing could be easier. This apparent simplicity,however, masks a highly complex industry, driven by a wide rangeof different issues.The industry is competitive, cyclical and (by definition) exposedto every possible risk. These risks can often be long-term andhard to define, leading to challenges around pricing and reserving.The industry needs capital to ensure it can meet its obligationsbut exactly how much capital is dependent on changing regulatoryand reporting requirements. In a competitive environment theindustry must continue to reduce cost and improve operationalefficiency, but at the same time the market is expecting growth.The industry is always looking for new opportunities in differentproducts and geographies. 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
Insurance Insights 2007 5There is plenty here then to keep hard-working insurance executivesvery busy. In this publication we have broken these issues downinto a clear framework and provided some additional insight into eachof these areas.Under ‘Growth and business development’ we look at the M&Amarket in different regions, the emerging market in India andthe growing opportunity for Sharia’a compliant Takaful insurance.Under the heading of ‘Efficiency and cost management’ we lookat the tax implications of different business operating models anda target operating model for the finance function. Under the headingof ‘Reporting and regulation’ we consider the differing reportingregimes in the U.S. and Europe and the complexities of reservereporting, while finally under ‘Risk and capital management’ we lookat the developing EU solvency regulation in comparison to the U.S.standards. Our introductory article reviews the recent results of themain insurance companies and provides comment on their maininitiatives and progress in these different areas.We trust you will find this work useful and relevant to your rolein the industry.Dr. Frank EllenbuergerGlobal Head of InsuranceKPMG in Germany 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
6 Insurance Insights 2007Industry introductionP8Insurance companies look back on a successful year1 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
Insurance Insights 2007 7 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
8 Insurance Insights 2007Insurance companieslook back ona successful yearThe results of the leading global insurance companies reportedin February and March show that profitability increased acrossthe board on the back of rising equity markets, hardening of therates for non-life business, growing demand for life productsand the welcome absence of the catastrophes we saw in 2005.But there are challenges ahead.These challenges can be summarizedunder the four key headings of: Growth and business developmentEfficiency and cost managementReporting and regulationRisk and capital managementGrowth and business developmentGrowth, for the largest players in theindustry, is an imperative. All the majorplayers have a significant growthpremium built into their share price andany signs of slowdown are greetedby downgrades and a market sell-off.This search for growth is particularlychallenging in what is a very cyclicaland competitive industry.The abnormal number of storms in 2005had one benefit. It prompted a generalrise in risk awareness and a considerablyhigher assessment of the potentiallosses. As a result, in the Americas,renewals were dominated by highdemand for catastrophe capacity.Munich Re also reported thatreinsurance negotiations in LatinAmerica and the U.S. resulted inappreciable price increases, especiallyfor property and offshore energy riskswith natural catastrophe exposure.Increased rates in this sector of themarket have helped offset fallingmargins in other sectors like U.S. andU.K. liability and U.K. and German motor,where increased competition is leadingto pricing pressures.Given the continuing pricing pressuresin mature and established markets,the growth of the top insurers has seengreater reliance on the availability ofdistribution channels. As a result,partnerships are becoming increasinglyimportant. For example, Aviva hasexperienced growth across its globalbusiness in part due to its bancassurancepartnerships. Aegon also entered intofour joint venture agreements during2006 to improve its global presenceand availability to the end consumer.As well as partnerships, acquisitionshave also helped to grow thebusinesses of several of the topinsurers, such as the acquisition ofAmerUS (United States) by Aviva.As the review of global Mergers andAcquisitions (M&A) activity on page 14points out, the bulk of acquisitions tookplace in the emerging markets. Avivaacquired 51 percent of Sri Lanka’s thirdlargest insurer, and Aegon made fouracquisitions globally, as well as openinga new branch in China. There were alsoacquisitions and investments by severalof the top global insurers in the CentralEastern European (CEE) region, which isexpected to be a future growth market.The acquisition of the Winterthur Groupby AXA was in part due to Winterthur’sstrong presence in the EasternEuropean region.Increased competition in more maturemarkets such as the U.K. and the U.S.has heightened the importance of brandrecognition for any player competing forpersonal business in the direct market – 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
Insurance Insights 2007 9AXA in the U.K. acquired Swiftcoverprecisely because of its strong brandidentity as an insurer.In terms of growth, life and non-life facevery different challenges. Life has hugepotential for growth – partly because ofincreasing individual wealth in emergingeconomies and partly because themarkets for savings and retirementrelated products in general are becomingmore buoyant. It is less easy forindividual insurers to see where growthin non-life is going to come from, otherthan through increased consolidation.Nor is there any agreement betweenthe life and non-life sectors on thecontribution the bancassurance modelcan make.Efficiency and cost managementThe top global insurers all reportedimprovements in combined ratios,driven largely by improved loss ratios.In 2005, of course, large increases inloss ratios were seen due to the highlevel of natural catastrophes.The expense ratio has risen for severalof the major insurers. In some cases, thisis due to one-off events. In others, theexpense growth reflects investments tosupport strategic ambitions in developingmarkets, or to launch new products inthe more competitive mature markets.Many of the top insurers had already putrestructuring programs into place before2006, but there has been continuedcommitment to these plans. The generaltrend suggests that the insurers arelooking for cost efficiencies through theconsolidation of support functions, aswell as streamlining core operations.Allianz reports that it expects its ongoingreorganization to lead to 500–600million of cost savings by 2009. Somefirms in the U.K., particularly thoseoperating in the Lloyd’s market, areconsidering moving their headquartersto more tax-efficient locations, suchas Bermuda (see article page 30).Given the large losses incurred in2005, the top insurers have been furtherfocusing on their underwriting andrisk-management discipline. AXA, forexample, has brought together theunderwriting functions from differentlines into a standalone unit. Whereexpense improvements have been madeduring 2006, underwriting excellence isgenerally cited as part of the reason.Reporting and regulationInsurers with European businesses facecontinuing regulatory costs in relationto Solvency II projects. Several insurershave also entered new markets this year– notably Eastern Europe and Asia Pacific– incurring additional compliance costs.For the top insurers regulated in theU.S., the National Insurance Act of 2006proposes an optional system of federalregulation as an alternative to thecurrent system, which operates usingdifferent regulations for each U.S. state.It will also enable the global insurers tomarket products profitably at a nationallevel. In the long term, the newprovisions are likely to lead to costsavings and increased revenues forthe insurers, although the costs ofmoving to a new system are likely toaffect profits in the short-term.Those insurers who have reported onan Embedded Value (EV) basis (seearticle on page 42), have tended toshow positive results. Ping An of Chinareported growth in its half-year results,which was a reflection of growth inboth adjusted NAV and in VIF. ING alsoreported EV growth, which was drivenby favorable investment performancein Europe and new business growth inCentral Europe, to some extent offsetby EV decreases in the Americas (inpart due to a weaker dollar) and theAsia Pacific region, where economicassumptions were revised.The current lack of global consistencyin the way insurers are asked to reporttheir results inevitably leads to a lack oftransparency. Attempts are being madeto improve the situation – as the articleson Solvency II, U.S. accountingchallenges, IFRS Phase II and EuropeanEmbedded Value in this publicationdemonstrate – but this is a significanttask and progress is – not surprisingly –slow given the complexity of thesubject. It is becoming ever more clear,however, that the huge strains thesechanges are placing on financialreporting systems and resourcesneed to be addressed. 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have anysuch authority to obligate or bind any member firm. All rights reserved.
10 Insurance Insights 2007Risk and capital managementFor global insurers, capital positions aregenerally strengthening and regulatorysurpluses remain at high levels, in linewith capital management policies whichtend to support this objective tomaintain credit ratings.Given the difficult conditions faced bythe top insurers recently, many arelooking to maximize the risk-return tradeoff. Low credit exposure is part of therisk strategy for several of the insurers,with high quality ratings sought forinvested assets. Some have also takensteps to reduce market risk by reducinglevels of equity investment incomparison to other investment types.Changes in the risk environment,particularly due to the increasedprobability and severity of weather-relatedcatastrophe, mean that insurers are facinggreater loss potentials. The approach hasbeen to reassess risks after 2005 andreflect this in pricing models, in somecases canceling business.companies is likely to lead to ratingagencies placing more weight onthose models.Challenges aheadThere are many challenges ahead forinsurers. Some are technical, such asthe introduction of Solvency II (seearticle page 56). Others are commercial,such as capitalizing on emerging growthmarkets like India (see article page 22)or exploring the rapidly growing demandfor Islamic insurance (see article page24). Still others are regulatory, as anumber of national and global bodiesstrive for true comparability andtransparency in the financial reportingof the world’s insurance co
KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parti
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