lu_inside12-full

Inside magazine issue 12 | Part 03 - From a corporate perspective
Changes in
regulation
A tightening of the regulations
might be quite expensive because
it implies more administrative
costs in order to fulfill the
regulation standards (PRIIPS,
Solvency II, FATCA, CRS, SST, IDD,
SFTR, NAIC Regulations in the
United States, etc.). Rising costs
and capital requirements are an
incentive to enter into an M&A.
As part of Solvency II, strong data
quality management is required.
Data must be appropriate,
complete, accurate and secure.
“Complete” and “secure” data
means powerful data storage
solutions are needed. This requires
insurance undertakings to either
augment the capacity of the data
storage systems or outsource it to
IT specialists in order to bring
down the costs.
Implementation of regulations
such as Common Reporting
Standards (CRS) demands strict
reporting obligations that
ultimately have to be outsourced.
The complex elaboration of the
Key Investor Information
Document (KIID) for each Packaged
Retail and Insurance-based
Investment Products (PRIIPS) will
require volume management and
have an impact on the distribution
process. Each regulation is very
demanding in terms of compliance
and reporting and this triggers
high management costs.
The costs arising from an
increased regulation may not be
sustainable by smaller or
specialized insurers, and this will
push them to seek economies of
scope or scale. They will need to
reallocate or release capital or sell
portfolios that are not part of their
core business or not in line with
their risk appetite.
What is the key to generating value in
life and non-life insurance business? 2
Life insurance business
For life insurance business, the indicators
that measure the return on investments
such as the Return on Assets (RoA) and
Assets-to-Equity are suitable indicators to
monitor the profitability of the business.
This is due to the fact that the margin on
life insurance business can be divided into
the margin on the interest rate, margin on
risks, and margin on expenses:
••
The margin on the interest rate
corresponds to the difference between
the net financial interest and the
guaranteed interest rate
••
The margin on risks corresponds to the
expected claims assumed on the pricing
and the effective claims in a given period
••
The margin on expenses is the difference
between the estimated costs implied on
the pricing of the product and the real
costs incurred.
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
2. Study based on the EIOPA Stability Report Dec 2015.
Historically, the most important component
of the overall margin has been the margin
on the interest rate. This is due to the fact
that it is difficult to enhance profit on the
expenses component, while the margin on
the risks depends on exogenous variables
such as the effect of longevity, leaving
very little scope to enhance this margin by
management actions.
Moreover, the fact that the life insurance
industry prefers to promote unitlinked
products and limit, reduce or
indeed eliminate guaranteed savings
products increases the correlation of the
performance of life insurance business with
the financial markets. This trend introduces
a challenge for insurance undertakings
to give added value to policyholders
as an alternative to other banking and
investment products.
The graph below shows how the RoA
median for life insurance business has
remained stable but low in the past couple
of years. For Q2-2015, the median was
0.4 percent. However, this result has not
factored in the decrease in bond yields
(due to recent stock market trends, the
cashing out of bonds, and derivative
positions).
Figure 7: Evolution of the Return on assets (RoA) for Life insurance business
Total. Median. interquartile range and 10 th and 90 th percentile
2010-Q2
2010-Q4
2011-Q2
2011-Q4
2012-Q2
2012-Q4
Source: EIOPA Financial Stability Report December 2015
(sample based on 32 large insurance group in EU and Switzerland)
2013-Q2
2013-Q4
2014-Q2
2014-Q4
2015-Q2
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