from finance transformation to value transformation · challenges propelling financial...
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From Finance Transformation to Value Transformation
20 April 2018
P&C European Actuarial Directors’ Forum
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Are you feeling the pressure from…
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Accounting requirements
Big data requires more significant IT structure Operational risk
Audit requirements, locking down
RegulationChanging customer behaviors
Cost pressure Market disruptors
Need for real-time decision making
Increased time to close the quarter/month/year
Lower investment returns
Innovations in technology
Increased competition
Shortened cycles for budgeting
New product development
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Are you feeling the pressure from…
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Accounting requirements
Big data requires more significant IT structure Operational risk
Audit requirements, locking down
RegulationChanging customer behaviors
Cost pressure Market disruptors
Need for real-time decision making
Increased time to close the quarter/month/year
Lower investment returns
Innovations in technology
Increased competition
Shortened cycles for budgeting
New product development
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John Morley
Agenda
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Challenges propelling financial transformation
How Vienna Insurance Group isaddressing these demands
Our most pressing problem (hint – it ends in 17)
Value transformation
Where do we go from here?
Tina Gwilliam
Bastian Kurth Werner Matula, VIG
Roger Gascoigne
Neil Bruce
Tina Gwilliam
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How VIG is addressing these demands
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Simple issue that might occurThe teachers case (1)
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Similar situations occur in our day-to-day business
Regular and necessary work of teachers: Preparing exams!
Frame conditions: This happens on a short notice and under time pressure!
Last step of the process: Printing the
exams!
Typical issue occurring: Paper reserves are
empty!
EXAM
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First solution – that does not helpThe teachers case (2)
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Did you observe similar situations in your company as well?
Today issue is solved
§ Finding someone who has paper
§ Jumping into the car pick up the paper
Action point 1
Solved for a longer period
§ Taking tablet and selecting e.g. the amazon App
§ Ordering massive amounts of paper
Action point 2Months later…§ The paper is empty
again in the same situation
§ Starting action point 1
Again action point 2?
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Better solution using automationThe teachers case (3)
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How can you get ahead of the problem?
What happened? When deciding for action point 2: We were not ahead of the problem?
§ Paper is obviously needed on a regular basis§ So a solution needs to provide the paper on a regular basis§ New action point: Using amazon abonnement and receiving paper each quarter
§ The kernel of the original issue could not be addressed by action point 2§ After ordering the paper it was foreseeable that it will re-occur§ The characteristic of the problem needs to be addressed by the solution
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A few years laterThe teachers case (4)
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Will it really work?
What did we achieve?
The situation did not re-occur and the paper reserves do just increase very slightly.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Because of regularly orders paper reserves
are never used up
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Vienna Insurance Group
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1994
2025,000
We are the leading insurance group in Austria, Central and Eastern Europe.
More than
employees
More than
millioncustomers
Around
Group companies50
STOCKEXCHANGE
Listed on the Vienna & Prague Since
Close to
years of experience200
Represented in
markets25
Rating
with stable outlookA+
on the Vienna Stock Exchange
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Poland CroatiaSerbiaGeorgiaAlbaniaLiechtenstein
At home in 25 countriesMarket leader and one of the top players in many markets
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HungaryBosnia andHerzegovinaMontenegroUkraineBelarus
AustriaCzech RepublicSlovakiaRomania Baltic StatesBulgariaMacedoniaMoldova
Top
01 04
10 >10TurkeySloveniaItalyGermany
Top
Top
1
10
6
4
11
1
>10
1
1
1
1
7
77
3
2
4>10
>10
>10
2
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group internal reinsurance, mainly MTPL and accident lines
mainly corporate business, property lines
Status Quo of Solvency II process before transformation
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Indirect Business
Given the decentralized structure of the company standard reporting templates have been created
Direct Business
§ For one reporting date approx. 100 filled template have to be evaluated
§ The process was built on a huge set of excel spreadsheets to carry out all the required calculations
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Status Quo of Solvency II process before transformation
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VIG head office
Validation Consolidation
RI ACC
Company 1
Company 2
Company 3
Company n
...
...QRTs etc.
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Motivation for entering into a finance transformation project
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§ Reporting deadlines become tighter every year, in particular for Solvency II reporting§ Solvency II Variation Analysis as new QRT requirement§ Improvement of regulatory requirements (traceability of calculations)
§ No changes to the reporting processes for subsidiaries in the initial step§ Release professional actuarial resources for analyzing and interpreting results rather than data work§ Create a default process without human interaction and let actuaries focus on the calculations§ Motivate actuaries to allow for a new process for their productive calculations
§ Upcoming IFRS 17
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Status Quo of Solvency II process after transformation
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VIG head office
Land
ing
plat
form
Company 1
Company 2
Company 3
Company n
...
QRTs etc.
RI ACC
SQLResQ SQL
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Phase 1: Evaluation of Status QuoThe general approach (1)
15
Series of workshops in the pre-implementation phase in order to develop a concept for the future process
Workshop series
Walking through current process
Defining scope of the future process
Identifying the minimum requirements for the future
process
Defining flexibility for the future setup
Concept
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Phase 2: Starting ImplementationThe general approach (2)
16
Weekly status calls
Team requirements
Database/ IT
Reserving Tool
Implemen-tation
Current Process
Expert level Progress control
Project Management
Decision Maker & Responsibility
Chief Actuary
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Phase 2: Challenging concept based on implementationThe general approach (3)
17
One-Day workshops each month during the implementation
Presentation of Status Quo
Discussing open issues
Comparison of Concept
Fulfilment of minimum requirements
Enhancements/ Changes of concept
Updated actuarial methodology
Revised processual challenges
Results of testing
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Phase 2: Testing and Roll-OutThe general approach (4)
18
Ongoing during implementation & 3 additional months after finalizing the implementation
Full run through the whole process
Planning of ressources not only for the testing but also for further adjustments
Identify potential for improvement
Testing Roll-Out
1
2
3
Defining of test cases
Defining of Checks
List of successful or failed test
Pre-productive run: Roll-Out requires training
First productive run: Guaranteeing expert available (in the background)
Post-productive run: Review of the recently finished process
1
2
3
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What did we achieve?Automation Environment (1)
§ Project setup via web application
§ Companies, Lines of business, Claim types etc.
§ Triangle history, Accounting date
§ Reinsurance Structure, Exchange Rates, Interest Rates
§ Data upload and import in ResQ via web application
§ Claims triangles, Claim counts, Earned premiums, etc.
§ Creation of default calculations (various ResQ methods)
§ Actuarial work in ResQ
§ Automated evaluation of the proportional RI program of VIG Holding
§ Review (sign-off) process using ResQ scripting
§ Automated roll forward and variation analysis
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Own SQL Server
Excel Add-In
What did we achieve?Automation Environment (2)
20
Reporting Options
SQL
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Quotes from project members involved
21
„The automation of a process forces oneself to ask: How does my calculation process look like at the moment, and how do I want it to look like ideally?“Philipp Gruber, arithmetica (VIG)
„Seeing a plant growing and harvesting the fruits is always a great story – building up VIG‘s new reserving environment and getting the feedback that it improved the process significantly is such a story.“Bastian Kurth, Willis Towers Watson
„Collaboration of VIG, Arithmetica and Willis Towers Watson went really well! The contribution of each individual’s strength made the project a success and great fun!“Laura Spiegel, Willis Towers Watson
„The team of WTW showed a great combination of actuarial skills and ResQ best practice know-how. This gives me the comfort to develop an optimal solution for my team.“Werner Matula, VIG
„With our new solution more time remains for the real actuarial work.“Wolfgang Knirsch, VIG
„Working with their IT and implementation support was great. I’ve rarely seen such skilled programmers. “Sebastian Justi, Willis Towers Watson
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More snakes than ladders?
IFRS 17 for P&C Companies
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The IFRS 17 journey from start to finishManaging the end-to-end process to deliver success
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IFRS 17 covers more than just financial reporting. Early investment and a structured planning approach are key to managing a smooth implementation programme. Insurers that start earlier, rather than later, will be in a better position to take advantage of ensuing market opportunities and will be best placed to shape their business journey and financial performance going forward.
Workstreams
Systems – financial, actuarial, aggregation and reporting
Data – availability, provision, storage, integration
Processes – operating model, working day timetable, fast close
People – capacities, engagement, training and knowledge transfer, outsourcing
Financial – financial impact and sensitivity, investor messaging, disclosures
Technical – technical analysis of IFRS 17 and related standards
Business strategy – products, pricing, ALM, reinsurance, M&A, distribution models
Phases
Phase IProgramme set up and
gap/impact analysis
Phase IIDetailed scoping,
technical and design decisions
Phase IIIImplementation
Phase IVPre-production, financial
refinement and disclosure
Phase VProduction and
transition to BAU
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Winning the IFRS 17 game of snakes and laddersFinding the ladders and avoiding the snakes
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§ For P&C insurers the initial reaction to IFRS 17 was relaxed. Most of the challenges seemed around life contracts.
§ So, let’s play. Throw a double six and we’re off! And straight up a ladder!
§ But as companies have started moving across the board a number of tricky issues seem to have emerged causing P&C insurers to start questioning their approach.
§ There seem to be snakes hiding in unexpected places. But where?
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Premium Allocation ApproachSo nothing changes, right?
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§ Use of Premium Allocation Approach (PAA)§ Simplified methodology for short-term
contracts with no burdensome CSM§ “Almost the same” as current
Unearned Premium Reserves§ No need to go through explicit
building block calculations§ No explicit risk adjustment§ No discounting of premiums§ Applicable to all one year and most
longer contracts§ What is not to like?
§ But not as simple as it seems…§ What do “not differ materially” or “no
significant variability of fulfillment cash flows” actually mean?§ Based on premiums received rather
on due or written§ Instalment-by-instalment – big
change from current accounting in some jurisdictions§ Are systems in place to match cash
receipts to actuarial calculations?§ What about premiums due but not
collected?§ Is the choice of PAA really such an
obvious or advantageous one?
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Onerous contracts and aggregation of contractsSo nothing changes, right?
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§ Portfolios according to “similar risks” and “managed together” seems like homogenous risk groups under Solvency II§ No testing required for onerous
contracts under PAA – all based on “facts and circumstances”§ Onerous contracts at inception “likely to
be relatively infrequent” and “generally be the result of an intentional pricing strategy”
§ Level of assessment for onerous contracts is the individual contract or, at best, a set of similar contracts§ How far down do companies need to
dig?§ Differential pricing of new business
compared to renewals? And what about annual cohorts? Cross-subsidies between products?§ Incorporation of pricing information – is
this something that we are conditioned to do? Is the view of the pricing actuary the same as that of the reserving actuary?§ Unbundling different risks in a single
contract?
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Outstanding claims
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§ Best estimate cash flows§ Adjusted for risk – from the entity’s
perspective§ Discounting might be new for
statutory reporting in most cases but surely we have done that for Solvency II anyway § So again nothing new here, surely?
§ But what does the need to produce numbers by group – and where groups are formed according to annual cohorts – mean for traditional accident year reserving processes?§ Do we need to calculate on an
underwriting year basis to generate results by group?§ And tracking multiple discount rates
(where OCI option used)§ And different discount rates
depending on approach used for measuring contract (PAA or GMM)
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Reinsurance
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§ Explicit classification, measurement and presentation of reinsurance contracts, independent of the consideration of the underlying direct business§ Potential mismatching issues caused by § Onerous direct contracts written in the knowledge of offsetting gains from reinsurance§ Combination of BBA and PAA§ Explicit allowance for reinsurance credit risk – expected not incurred§ Aggregation – what is a portfolio of reinsurance contracts? Unbundling multi-line
reinsurance contracts?§ Consolidation issues – intra-group reinsurance needs to be fully eliminated
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How to win the game?
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Technical, financial and operational impacts – interrelationshipAn efficient impact analysis will do sufficient evaluation for governed, informed and quick decisions
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Financial
Operational
Technical
§ IFRS 17 involves making technical choices, each of which has operational and financial impacts. § Investigating and evaluating every aspect of the
full range of options will be overly time consuming.§ However, options should not be dismissed until
they are adequately understood.§ The Impact Analysis should be structured with
interim transparent decision steps to ensure an efficient but well-governed process.
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Key factors for a successful IFRS 17 implementationMany factors to consider
§ Clarity in objectives – financial, business and operational§ Informed, efficient and effective governance§ Understand the business impact (and adapt for it) – ‘start at the end’§ Stakeholder buy in to the programme§ Appropriate prioritisation and allocation of resources § Accurate information and work quality§ Clear end state process – how will you phase the transition to this?§ Aligned to and complements other business objectives over transition period§ Recognise it’s a journey – a process of continuous improvement as internal and
industry methodology is refined
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What is your Business Unit’s view of IFRS 17? How and when will you form one? Do Business Unit and Group views complement each other?
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Solvency numbers and a new complex P&L… but all in half of the timeHow to make this happen?
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Number of weeks after year end
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Solvency II Group - 2016
Solvency II Group – 2019
Major European insurers YE2016 reporting
Financial reporting in 2021
Average, based on 5x of the largest European insurers for y/e 2016 financial reporting
?
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Value transformation
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Change driversAll organisations face market and regulatory pressure and need to react
Finance, Risk and Actuarial Goals
Give more back to the business with less
More granular regulatory and accounting standards
Reporting time line constraints and convergence
The need for faster MI for timely decisions
Better quality MI for business steering
Cover more regulation with less
Organisational Goals
Market PressureCompetition and
economic environment
Regulatory PressureCustomer, Capital and accounting standards
Faster
Better
Cheaper
Profitable Sustainable
External Reporting
Internal Reporting
IN OUT
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Faster, Better or Cheaper How these drivers change the end state solution
Effective industrialisation brings enhanced systems integration, governance and workflow management to the process and can be extended beyond reserving
Data Preparation Analysis Review Reporting
Early warning Pricing supportScenario testing
Uncertainty analysis
Data Preparation Analysis Review Reporting
Regulatory needsValue add
Business impact
Data Preparation Analysis Review Reporting
Industrialising the current reserving process can lead to…
Data Preparation Analysis Review Reporting
Better Analysis
Faster Delivery
Cheaper Delivery
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Can apply to more than just reservingBut requires a defined and repeatable process to maximise benefit
AdjustmentsBenchmarks
Reporting
US GAAPUS GAAP Business PlanningBusiness Planning
Product PricingProduct Pricing
Business ValuationBusiness Valuation ReservesReserves Solvency
CapitalSolvency Capital RiskRisk
Policy data Reserving tool
Claims data
Discount ratesAllocations
Example for the reserving process
To provide complete automation and integration of end-to-end reporting software
Grouping
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Can apply to more than just reservingBut requires a defined and repeatable process to maximise benefit
AdjustmentsBenchmarks
Reporting
US GAAPUS GAAP Business PlanningBusiness Planning
Product PricingProduct Pricing
Business ValuationBusiness Valuation ReservesReserves Solvency
CapitalSolvency Capital RiskRisk
Policy data Reserving tool
Claims data
Discount ratesAllocations
Example for the reserving process
To provide complete automation and integration of end-to-end reporting software
GroupingIntegration and Automation
Policy data
Claims data
Cleaning Grouping
Discount rates
Benchmarks
Reserving tool
Capital model/ RA/RM
Adjustments
Planning ULRs Allocations Reporting
UY/AY/TP/ IFRS 17
conversions
Data extraction, preparation and validation Parameterisation and Analysis Report
TP data
RI data
Committee packs
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IFRS 17 end to end composite solutionExample architecture
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Life Cash-flows
P&C Cash-flows
Third Party Cash-flow Tools
AdminP&C
AdminLife
Assets
ESG
RI
IFRS 17 Engine
Prepare and Store
Life
P&C
SourceSystems
S2 / IFRS Results
InputData
Unify
Willis Towers WatsonRiskAgility FM
DataValidator
Star ESG
ResQ
Extract Transform
and Load(inbound D
W -S
AP
)
Extract Transform
and Load
Group Disclosure / Reporting
Statutory Reporting
Regulatory Reporting
Management Reporting
Consolidation
Local General Ledger
Generate GL postings
Perform Closing
Create BS / P&L
Local Disclosure / Reporting
Statutory Reporting
Regulatory Reporting
Management Reporting
Local Entity Group
Insurance Accounting SL
Journal posting engine
SAP, Oracle, etc. EPM layer
PBF
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Unify functional overviewMarket leading and unique workflow automation and governance software design by and for actuarial and finance professionals
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§ Integration – including active workflow management with WTW software solutions and third party software
§ Automation – of manual repeatable and predictable activities including monitoring and management§ Governance – including security, process review and approval, version control and audit of these
systems and processes
Three functional pillars of Unify
§ Reserving, risk and finance process industrialisation for P&C and composites§ Essential building block of the IFRS 17 solution
Key applications for Unify
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Client example
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Before… After…
* Slide provided by a major client
§ Improve process efficiency and resource allocation through process/system automation.
§ Eliminate end user computing§ Maintain auditable history of data,
calculation steps and sign-off processes.
§ Establish standardized reporting§ Improve flexibility and granularity
of input datato foster high quality analyses.
§ Strengthen comparability of data bases betweenpricing and reserving.
§ Offer system for proactive actuarial data management.
§ Fulfil Solvency II data and process governance requirements (incl. recommendations of Actuarial Function) and prepare processes and systems for IFRS 17.
§ A major global client bases the current non-life reserving process on ResQ as actuarial core application
§ Currently the process was supported with a lot of Excel files§ The four eyes principle is mostly realised but quite manually
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Evolution of the Reserving Process§ Streamlining of the analysis stage only scratches the surface of
efficiency gains
§ A holistic approach acknowledging stakeholder needs and working across functional/process boundaries unlocks maximum benefit
§ Automation can speed up any process, and workflow can reduce inefficiencies in hand-offs between people, departments and processes
§ However, having the correct control environment can reduce the inefficiencies in changing that process to meet new challenges
Output and Review
Roll Forward
Import
Method Preparation &
Modelling
Validate
Unify
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Conclusions
Tighter controls around the process, reducing key person risk and allowing easier auditing
Reducing the ability and need for actuarial intervention in the data and reporting phases
More time for analysis (unconstrained by reporting timetables and with focus on the important rather than the mundane)
Better integration with other functions, particularly finance
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A well defined, repeatable process
A holistic approach to view the reserving process in context
Considering stakeholder requirements
Looking at related projects in the organisation
Determination!
But to make the most of it requires:
Process reengineering can lead to:
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Where do we go from here
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What does the future hold?
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P&C European Actuarial Directors’ Forum
Four Seasons Hotel, Budapest
19-20 April 2018
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