kid, an operational challenge - creobis · pdf filepowerpoint timesaver. 12 • product...
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2© 2016. Deloitte Touche Tohmatsu Limited
Agenda
Coordination between Solvency II, MiFID and IDD
How to deliver KID in time?
How to adapt your process for PRIIPs?
Impacts & challenges for the Insurance industry
KID, different possibilities
Annex: Zoom on Risk, performance and cost sections
3© 2016. Deloitte Touche Tohmatsu Limited
Coordination between Solvency II, MiFID and IDD
Regulatory convergence and/or contamination
Banks Investment Funds Insurance undertakings
PRIIPS
Insurance Distribution DirectiveDistribution channelsDistribution channels
MiFID II Conflict of interest - Commissions
UCITS InvestmentrestrictionsDistribution
ImpactOriginal scope
Solvency IIData
Unit-linked policies & Investment funds
A solid and long-term relationship: the historicalevolution on the type of investments of unit-linked lifeinsurance policies in Luxembourg shows a strong preferenceof investment funds as underlying assets. On average, from2000 to 2014, they constitute 49% of unit-linkedinvestments.
Source: CAA Annual reports (2000 to 2014)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Investment funds
Equities
Bonds (both public and private issuers)
Other (incl. debt obligations vs reinsurers)
49%
4© 2016. Deloitte Touche Tohmatsu Limited
Agenda
Coordination between Solvency II, MiFID and IDD
How to deliver KID in time?
How to adapt your process for PRIIPs?
Impacts & challenges for the Insurance industry
KID, different possibilities
Annex: Zoom on Risk, performance and cost sections
5© 2016. Deloitte Touche Tohmatsu Limited
Observed scenarii and macro planning for all possibilitiesHow to deliver KID in time?
Regulation analysis(new RTS* or level 1)
Scenario 1Scenario 2Scenario 3Scenario 4
TOM review
Scenario 1Scenario 2Scenario 3Scenario 4
Preparation
Scenario 1Scenario 2Scenario 3Scenario 4
Onboarding KID Factory
Scenario 1Scenario 2Scenario 3Scenario 4
Soft launch (testing,dry run,…)
Scenario 1Scenario 2Scenario 3Scenario 4
Go live
Scenario 1Scenario 2Scenario 3Scenario 4
Macro planning for each scenario
For the first time, level 2 regulatory measures are rejected by the EU parliament. Thus the EU Commission has 4 options (more or less probable):
A historical situation!
Graph Characteristics Chance Impact
Scenario 1 • No delay• Level 1 only Low
Scenario 2 • No delay• Use of rejected RTS Low
Scenario 3 • No delay• New RTS issued shortly Low
Scenario 4 • X months delay• New RTS High
How to anticipate the best?
Product universe
• Review investment universe
• Offering review
Customer experience
• Develop website
• Increase knowledge of intermediaries
Customer protection
• Investment profile set-up
• Link IDD & PRIIPs
Data collection
• Anticipate data collection
• Increase relationship with Asset Managers
10/16 01/17 06/17 01/18**
* Assumption that the new RTS draft available on 01/11/2016 if small adjustments or 31/12/2016 if more consistent modifications
** 01/2018 supposed to be the new entry into force date. To be confirmed by the EU Commission
6© 2016. Deloitte Touche Tohmatsu Limited
Key success factorsHow to deliver KID in time?
Web publishing(distributor’s / policyholder’s portal)
Content creation (plain language, SRI, charges)
Document Production(assembly and air traffic controls)
Dissemination(distributors, regulator?)
Key factors for a successful PRIIPs implementation
The building blocks of a solution
Multidisciplinary team• Regulatory• Risk management• Reporting
Technology• KID specific• Integrated within the product
production chain
Processes• Heavy-duty quality checks on
incoming data• Systematic controls:
completeness, accuracy, reasonability, timeliness
7© 2016. Deloitte Touche Tohmatsu Limited
• Plain language• Common elements• Rationalization
Initial focus
• Update of dynamic data (risk, charges, perf) • Maintain consistency
On-going maintenance
Key focuses
• Accelerate time to market• Consistent look & feel, common language• Reduced translation costs
Benefits
Anatomy of a KID
Multi level reuse of common narrative is keyHow to deliver KID in time?
2
3
4
5
1
2 3 4 51
Accross all KID Contract’s profile Conditional
8© 2016. Deloitte Touche Tohmatsu Limited
Typical implementation stepsHow to deliver KID in time?
Week 7Week 6Week 5Week 4Week 3Week 2Week 1 Week 8
Design KID look & feel
Marketing
Identify data sources & collect
Investment services
Define risks calculations
Investment risk
Create plain language narrative for each investment policy
Legal team
System set-up:• Database • Compilation engine• Graphic rendering
engine
Reporting & IT
Review and validation
All teams
Test and set-up data transmission, transformation and collection controls
Reporting & IT
Define publication format and rules
Marketing & Reporting
Define dissemination format and rules
Investment services
DESIGN DIGITALISATION DISSEMINATION & PUBLICATION
Lessons learned
Lessons learned
Lessons learned
9© 2016. Deloitte Touche Tohmatsu Limited
Risk!• KID model might not fit to your
activities• Software / service provider
approach may not work for your organization
• Incorrect level of involvement of your team is needed
• Data quality issues may arise• No financial control
Str
ess
leve
l
3. Conduct RFP* 4. Planimplementation1. Evaluate situation 2. Target operating
model
“Normal project”
5. Implementation
“Stressed project”
• Regulatory analysis
• Document strategic direction and objectives
• Conduct value, profiling and benchmarking
• Develop and teststrategic / financial assumptions
• Conduct workshop with key stakeholders
• Define operating model (offering, distribution, process, organisation, network, etc.)
• Select KID option (profiled, MOP, personalised)
• Prepare dataflows
• Define RFP guidelines
• Organize RFP
• Select provider or system
• Contract with software provider or external service provider
• Macro and micro planning of the implementation phase
• Confirm TOM orientations
• Validate financial hypothesis
• Organize project
• Conduct project
• On-going project management
• Regulatory compliance alert
• Participation to industry meetings
3. Implementation1. Conduct RFP 2. Evaluate situation
• Comparison of several offering of different nature (software, service provider)
• No scope clearly defined
• Long RFP period due to uncertainty of the model
• Assessment of the situation by taking into account the chosen provider
• Adapt financial needs
• Adopt process and methodology
• Conduct project
• On-going project management
• Regulatory compliance alert
• Participation to industry meetings
How to deliver KID in time?What we observed last months
* In case of outsourcing
10© 2016. Deloitte Touche Tohmatsu Limited
Agenda
Coordination between Solvency II, MiFID and IDD
How to deliver KID in time?
How to adapt your process for PRIIPs?
Impacts & challenges for the Insurance industry
KID, different possibilities
Annex: Zoom on Risk, performance and cost sections
11© 2016. Deloitte Touche Tohmatsu Limited
Impacts & challenges for the Insurance industry
A very close relationship
between actors
Insurance undertaking
ProductDistribution network
• Data quality• Data availability• Set-up interfaces
• Cost pressure• TOM to be defined• Offering monitoring• Documentation maintenance
• Simplification• Rationalization• Unit-linked transition is jeopardized
• Generic KID is not a differentiator• Distributor training• Adapt current distribution process
• Profiling• Litigation risk• Risk of misunderstanding• Increase comparability
Asset servicers
Clients
A very close relationship between actors
12PowerPoint Timesaver
• Product flexibility (optional death coverage, investment strategy, etc.)
• Legacy portfolio management• Uncertainty regarding the cost induced by the profit sharing
allowance and real portfolio performance• Quantitative figures not easy to explain• Narratives have to be in line with other contractual documents• Tax incentive not reflected
• Proxy to be defined with Asset Managers or defined unilaterally• Financial RHP <> Tax RHP
• Cost collection (transaction fees, etc.)• Max cost presentation (worst case scenario)• Cost linearization• Insurance cost : − Full premium VS Cost part of the biometric risk premium− Max biometric characteristics− Range of ages− One KID/age− Optional death coverage not disclosed
• CRM (Rating group VS rating SOLO, guarantee fund, triangle of security)
• Cost impact on risk measures• KID and mini KID risk not easy to apprehend (especially when high
number of underlying)• Lack of historical data for certain underlying (data quality issues)
PerformanceGeneral considerations
Costs Risk
Impacts & challenges for the Insurance industry
13© 2016. Deloitte Touche Tohmatsu Limited
Agenda
Coordination between Solvency II, MiFID and IDD
How to deliver KID in time?
How to adapt your process for PRIIPs?
Impacts & challenges for the Insurance industry
KID, different possibilities
Annex: Zoom on Risk, performance and cost sections
14© 2016. Deloitte Touche Tohmatsu Limited
Outsourced vs. internal solutionHow to adapt your process for PRIIPs? Internal
Servicer
On premise
Narratives set-up
Insurer specifics
Data management
Data acquisition from third parties
Risk, performance and costs calculation
KID Production
Trigger management & update
Validation of new / updated KID
Translation coordination
KID filing and safe-keeping
Audit trail
Regulatory watch
KID Assembly outsourced
Narratives set-up
Insurer specifics
Data acquisition from third parties
Risk, performance and costs calculation
KID Production
Trigger management & update
Regulatory watch
KID filing and safe-keeping
Audit trail
Translation coordination
Data management
Validation of new / updated KID
Fully outsourced solution
Narratives set-up
Data management
Risk, performance and costs calculation
KID Production
Trigger management & update
Regulatory watch
Translation coordination
KID filing and safe-keeping
Audit trail
Data acquisition from third parties
Validation of new / updated KID
Insurer specifics
Set
up
Low outsourcing Important outsourcing
15© 2016. Deloitte Touche Tohmatsu Limited
How to adapt your process for PRIIPs?
Change of the Investment
strategy
Arbitrage / Switch
UnderwritingDistribution
Change of the Investment
profile
Change of the Asset manager
New Investment
support
KID maintenance
Annual review
BoD
Approved director (CEO)Internal Audit Legal
Policy administration
Operations(COO)
Accounting
Finance and support (CFO)
Business development
Business dev.(CCO)
IT (CIO)
Operations (run)
Investment services HRNew project
managementInfrastructure
Client relationship management
Administration & logisticsMaintenance
Reporting & quality assurance
Head of Risk & Compliance
Risk & Compliance team
Process to be adapted Organisational impacts*
No impact
Impact
* Typical organisation
16© 2016. Deloitte Touche Tohmatsu Limited
Agenda
Coordination between Solvency II, MiFID and IDD
How to deliver KID in time?
How to adapt your process for PRIIPs?
Impacts & challenges for the Insurance industry
KID, different possibilities
Annex: Zoom on Risk, performance and cost sections
17© 2016. Deloitte Touche Tohmatsu Limited
Depending on product typologyKID – Different possibilities
Competition pressure +- Competition
pressure
Personalization level +- Personalization
level
Cost customization +- Cost
customization
1 KID1 contract =Generic
KID=Contracts Segment definition
KID production volume +-
18© 2016. Deloitte Touche Tohmatsu Limited
Three scenarios in a nutshellKID – Different possibilities
• Production of a single KID about the overall PRIIP (including the chosen investment option)
Scenario 1
- 1 KID per contract
• Production of a single KID combining generic and specific information in relation to each Investment option.
or
Scenario 2
- 1 KID per profile
+
Scenario 3
- 1 generic KID- X specific « Mini KIDs »
or
• Production of a single generic KID about the overall PRIIP and disclose specific information about each underlying option
• A switch from one scenario to the other may also be envisaged
• All scenario are permissible as per the RTS
19© 2016. Deloitte Touche Tohmatsu Limited
One KID per contractKID – Different possibilities
Analysing in-deptheach single contract
Benchmarkassignment
Retrieving all impacting costs / fees
Identifying the investment strategy
Managing country and language specificities
Managing unquoted assets and other peculiarities
The choice of providing “One KID per contract” implies a series of activities to carry out, starting with an in-depthanalysis of each single contract and proceeding with the identification and collection of the needed information.
20© 2016. Deloitte Touche Tohmatsu Limited
One KID per profileKID – Different possibilities
The choice of providing “One KID per profile” implies a fundamental preliminary activity aimed at grouping the bulkof securities at Asset Manager level so as to detect “common profiles” and reduce the number of KID to be produced
250 KID profile-based toproduce in place of 1000
1000 KID at Asset Manager level(e.g. UCITS, direct lines, etc.)
500 KID grouped by cost structure
+
1st grouping criteria(e.g. cost structure)
2nd grouping criteria(e.g. investment strategy)
250 KID grouped by investment strategy
Please, notice that the example here above provided is for illustration purposes
21© 2016. Deloitte Touche Tohmatsu Limited
Generic + Mini-KIDKID – Different possibilities
The choice of providing “Generic KID + Mini-KIDs” implies the definition of the assets subjects to Mini-KID (i.e.external funds, guaranteed interest rate with profit sharing, internal dedicated funds, internal collective funds, directsecurities lines, etc.), the definition of each section of the generic KID and a structured aggregation of all the identifiedinformation so as to produce and deliver a fully compliant KID.
Analysis of volume and variety of KID to produce, also aimed to detect technical constraints
Definition of each single section of the generic KID
Definition of all the assets subjects to the Mini-KID
Structured aggregation of the information to form the final KID
Approach supported by most French Insurance Undertakings
22© 2016. Deloitte Touche Tohmatsu Limited
Scenario 3 in detailsKID – Different possibilities
KID X: “Mini-KID”KID 1: Generic KID
Explain that: the PRIIP offers a range of
underlying investment options with a short overview of the underlying investment options,
target market varies depending on the choice of underlying
the choice of an underlying investment option can be changed
What is this product?
Explain that the risks and returns of a retail investor depend on its choice of underlying investment options
Risks & Return?
Explain that the costs that the retail investor is due to pay, including, where relevant, costs associated with future variations to the underlying investment options made within the PRIIP, depend on the choice of the retail investor in relation to underlying investment options
Costs?
“You are about to purchase a product that is not simple and may be difficult to understand.”
Comprehension alert
Show the range of the lowest and highest risk classifications of the underlying investment options
Risk classification
Explain how the performance of the PRIIP as a whole depends on the underlying investment options and indicate where relevant further information is to be found, instead of showing the performance scenarios
Performance indicator
Show the range of the recurring and incidental costs for the PRIIP and its underlying investment options
Cost indicator
Same information that are required within the “What is this product?” section.
Investment objectives
Same information that are required within the “What are the risks and what could I get in return?” section.
SRI
Same information that are required within the “Performance scenarios” section.
Performance scenarios
Same information that are required within the “What are the costs?” section.
Costs
23© 2016. Deloitte Touche Tohmatsu Limited
Agenda
Coordination between Solvency II, MiFID and IDD
How to deliver KID in time?
How to adapt your process for PRIIPs?
Impacts & challenges for the Insurance industry
KID, different possibilities
Annex: Zoom on Risk, performance and cost sections
24© 2016. Deloitte Touche Tohmatsu Limited
SRI, performance and cost measures
Cat. 1
Cat. 2
Cat. 3
Cat. 4
External funds - traditional assets
Multisupport (e.g. guaranteed interest rate and unit-linked)
Internal funds and FAS – non observed factors
Internal funds and FAS – observed factors and constant multiples
Valorisation frequency higher than monthly
Guaranteed interest rate with profit sharing
Internal funds and FAS – observed factors and mix between constant and non-constant multiples
Internal funds and FAS – observed factors and non-constant multiples
Internal funds and FAS – Private equity funds
External funds - structured products
S3; S7
S1; S10
S2; S5; S6; S11
S4; S8; S9
Scenario1
Scenario2
Scenario3
Scenario4
Scenario5
Scenario6
Scenario7
Scenario8
Scenario9
Scenario 10
Scenario 11
Internal funds and FAS – “Pure” private equity
Exte
rnal
N.A
.In
tern
alBot
h
25© 2016. Deloitte Touche Tohmatsu Limited
SRISRI, performance and cost measures
Market RiskCredit Risk MR1 MR2 MR3 MR4 MR5 MR6 MR7
CR1 1 2 3 4 5 6 7CR2 1 2 3 4 5 6 7CR3 3 3 3 4 5 6 7CR4 5 5 5 5 5 6 7CR5 5 5 5 5 5 6 7CR6 6 6 6 6 6 6 7
Aggregation to a single SRI
• SRI is a guide to the product’s level of risk, helpingthe investor to assess it and compare it with otherproducts
• It takes into account how likely the investor canlose money and the possibility to enter some formof protection
Credit Risk Measure
• Credit risk shall be assessed when the return onthe investment depends on the creditworthiness ofmanufacturer or the party bound to make therelevant payment to the investor
• On AIFs and UCITS (net of exceptions) credit riskshall not be assessed
Market Risk Measure
• PRIIPs can be assigned to 7 MRM classes and forthis purpose they are divided into 4 categories
MRM
CRM
SRI
+
=
Example of PRIIPs’ classification according to four categories (non exhaustive list):• Category I: Where investors could lose more than the amount invested; Derivatives and PRIIPs with insufficient historical
performance data or illiquid underlying assets;• Category II: PRIIPs which offer non-leveraged exposure to the prices of underlying investments, or with constant multiples;
Standard unit linked products;• Category III: PRIIPs whose values reflect the prices of underlying investments, but not as a constant multiple of the prices of
these underlying investments; Structured products;• Category IV: PRIIP whose value depends in part on factors not observed in the market. This includes insurance-based PRIIPs
which distribute to retail investors a portion of the PRIIP manufacturer’s profits. Guaranteed Interest rate with Profit sharing.
• PRIIPs’ manufacturer defines ex-ante one ormore credit rating agencies, whose creditassessment constitutes the reference for theCRM assignment
• Credit risk level of each relevant obligor shallbe assessed : in case of credit risk assessed atdifferent layers, all exposures are separatelyevaluated, per layer, and the credit riskassigned is the highest one
• Liquidity Risk : for products tradable over their life but for which no regulated liquid market exists, a warning shall be included within the SRI, highlighting that selling the PRIIPbefore the RHP may not be possible and/or imply remarkable costs or losses.
• Narrative explanation : it shall accompany the SRI and briefly explain its purpose, as well as the underlying risks and, where applicable, all material risks not adequatelycaptured by the indicator
• Other warnings : if issues on cashing-in before maturity or currency risks exist, they shall be properly mentioned and described
Qualitystep Credit Risk class Rating Class
0 CR1 AA / AAA1 CR1 AA2 CR2 A3 CR3 BBB4 CR4 BB5 CR5 B6 CR6 CCC
26© 2016. Deloitte Touche Tohmatsu Limited
Determining the unfavourable, moderate and favourable scenariosSRI, performance and cost measures
The scenario values under different performance scenarios shall be calculated in a similar manner to the market risk measure, i.e. based on the distribution of historical returns. The scenarios shall be calculated for the recommended holding period.
The unfavourable scenario shall be the value of the PRIIP at the 10th percentile.
The favourable scenario shall be the value of the PRIIP at the 90th percentile.
The moderate scenario shall be the value of the PRIIP at the 50th percentile. Calculation of expected values for intermediate holding
periods
• For PRIIPs with a recommended holding period between 1 and 3 years, performance shall be shown at 2 different holding periods: 1 year and at the end of the recommended holding period.
• For PRIIPs with a recommended holding period of 3 years or more, performance shall be shown at 3 holding periods: 1 year, half the recommended holding period rounded up to the nearest year, and the recommended holding period.
• For PRIIPs with a recommended holding period of 1 year or less, no performance scenarios for intermediate holding periods shall be shown.
27© 2016. Deloitte Touche Tohmatsu Limited
3 scenario: unfavourable, moderate and favourableSRI, performance and cost measures
Unfavourable Scenario
Highlights the features of theproduct and the economicconditions which could give riseto an unfavourable outcome forthe retail investor
Moderate Scenario
Highlights the features of theproduct and the economicconditions which could give riseto an moderate outcome for theretail investor
Favourable Scenario
Highlights the features of theproduct and the economicconditions which could give riseto an favourable outcome for theretail investor
3
2
1
• Fair, accurate, clear and not misleading presentation to enable the retail investor to understand possible outcomesunder different market conditions
• Each scenario accompanied by a narrative text (indicating, where applicable, conditions for returns to retail investorsor performance caps)
• Information presented at the Recommended holding period (and for two interim periods, unless the product isconsidered to be illiquid)
• Information based on reasonable and conservative assumptions on future market conditions and price movements(e.g. positive does not mean unreasonably optimistic)
• Analysis of available market data of the financial variables influencing the payoff (hypotheses depending on theRecommended holding period)
• Performance calculated net of total costs (included proper assumptions on performance fees)• Consistency with the information in other KID sections (e.g. for future profit participation, assumptions coherent with
the ones on the annual rates of return of the underlying assets)
• For insurance-based PRIIPs, the three scenarios shall be calculated considering that no payments resulting from insurance coverage occur during the holding period. Notwithstanding, anadditional scenario shall be included for insurance-based investment products, presenting the return in case an insured event occurs.
• An additional scenario shall be also added to show significant downward impact features of the product whether they are not adequately covered within the three standard scenarios.
28© 2016. Deloitte Touche Tohmatsu Limited
Costs measuresSRI, performance and cost measures
• Fair value of the products shall be determined on market prices, internal pricing models (comparable approach or market-to-model)• Cost disclosure structure similar to MIFID II (and substantially different then for UCITS KIID)• Costs are strictly related to the product in point; other costs charged by advising/selling persons are not shown• Message to display: “figures are partially based on data from the past and thus may change in the future”
One-off costs Recurring costs Incidental costs
%Entry costs
%Exit costs
%Portfolio
transactioncosts per year
%Insurance
costs
%Performance
fees
Impact of entry costs taken before investment (max. payable amount)
Impact of exit costs when exit the investment upon maturity
Impact of recurring costs taken each year from the investment, based on last year costs (best estimate).Figures cover all recurring costs, including insurance costs, management costs, operating expenses and portfolio transaction costs
Impact of average performance fees / carried interest
%Other ongoing
cost
COMPOSITION OF COSTS1
• Static data, obtained ex-post, backward looking
SUMMARY COST INDICATOR – REDUCTION IN YIELD (RIY)2
• Dynamic, calculated ex-ante, forward looking indicator• RIY shall be calculated as the difference between two percentages:− The annual internal rate of return related to gross payments made by the investor and the estimated payments to the investor during the RHP− The annual internal rate of return for the respective cost-free scenario− Based on “moderate” performance scenario, using the same holding periods as in the performance scenarios
30© 2016. Deloitte Touche Tohmatsu Limited
Senior Consultant
+352 45145 4955
Partner ¦ Insurance leader
+352 45145 4920
Consultant
+352 45145 3658
Contacts
Thierry Flamand Florent Anders Alexandre Schneider