kid, an operational challenge - home - creobis timesaver 12 • product flexibility (optional death...

KID, an operational challenge10 October 2016

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 for the Insurance industry

KID, different possibilities

Zoom on Risk, performance and cost sections



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%


Agenda








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


Preparation


Onboarding KID Factory


Soft launch (testing,dry run,…)


Go live


Macro planning for each scenario

For the first time, level 2 regulatory measure 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 new RTS draft available on 15/10/2016 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


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


• 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


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


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. Planimplementation

1. Evaluate situation 2. Target operatingmodel

“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, orga., network etc.)

• Select KID option (generic, MOP, perso.)

• 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

* If applicable


Agenda









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 mis-understanding• 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 Best estimate− 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

Challenges for the Insurance industry


Agenda








Outsourced vs. internal solutionHow to adapt your process for PRIIPs ?

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



KID Production


Regulatory watch


Audit trail


Data management


Fully outsourced solution

Narratives set-up

Data management


KID Production


Regulatory watch



Audit trail



Insurer specifics

Internal

ServicerSe

tup

Low outsourcing Important outsourcing


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


Agenda








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 +-


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.

• Production of a single generic KID about the overall PRIIP and disclose specific information about each underlying option

or

Scenario 2

- 1 KID per profile

+

Scenario 3

- 1 generic KID- X specific « Mini KID»

or

• A switch from one scenario to the other may also be envisaged

• All scenario are permissible as per the RTS


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 provid ing “One KID per contract” imp lies a series of act ivities t o carry out, st arting with an in-depthanalysis of each single contract and proceeding with the identification and collection of the needed information.


One KID per profileKID – Different possibilities

The choice of provid ing “One KID per profile” implies a fundamental preliminary activit y 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


Generic + Mini-KIDKID – Different possibilities

The choice of providing “Generic KID + Mini-KID” implies the defin ition of the assets subjects to Min i-KID (i.e.ext ernal funds, guaranteed int erest rat e with profit shar ing, internal ded icated funds, internal collective funds , d irectsecurit ies lines, etc.), the defin ition of each section of the gener ic KID and a structured aggregation of all the ident ifiedinformation 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


Scenario 3 in detailsKID – Different possibilities

KID X: “Mini” KIDKID 1: Generic KID

Explain that:4 the PRIIP offers a range of

underlying investment options with a short overview of the underlying investment options,

4 target market varies depending on the choice of underlying

4 the choice of an underlying investment option can be changed

What is this product?

4 Explain that the risks and returns of a retail investor depend on its choice of underlying investment options

Risks & Return?

4 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?

4 “You are about to purchase a product that is not simple and may be difficult to understand.”

Comprehension alert

4 Show the range of the lowest and highest risk classifications of the underlying investment options

Risk classification

4 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

4 Show the range of the recurring and incidental costs for the PRIIP and its underlying investment options

Cost indicator

4 Same information that are required within the “What is this product?” section.

Investment objectives

4 Same information that are required within the “What are the risks and what could I get in return?” section.

SRI

4 Same information that are required within the “Performance scenarios” section.

Performance scenarios

4 Same information that are required within the “What are the costs?” section.

Costs


Agenda








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

alBo

th


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 inves tor to assess it and compare it wi th o therproducts

• It takes in to 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 inves tment depends on the creditworthiness ofmanufacturer or the party bound to make therelevant payment to the investor

• On AIFs and UCITS (ne t 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 l ose more than the amount invested; Derivatives and PRIIPs with insuffic ient 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 underlyi ng 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 li fe 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 underlyi ng 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


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.


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 tobe 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 assumptionson 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 t he 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.


Costs measuresSRI, performance and cost measures

• Fair value of the products shall be determined on market prices, internal pricingmodels (comparable approach or market-to-model)• Cost disclosure structure similar toMIFID II (and substantially different then for UCITS KIID)• Costs are strictly related to the product in point; other costs chargedby advising/selling personsare not shown• Message todisplay: “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


Thank you for your attention!


Senior Consultant+352 45145 4955

[email protected]

Partner ¦ Insurance leader+352 45145 4920

[email protected]

Consultant+352 45145 3658

[email protected]

Contacts

Thierry Flamand Florent Anders Alexandre Schneider

kid, an operational challenge - home - creobis timesaver 12 • product flexibility (optional death...

Documents