KID, an operational challenge 10 October 2016

Transcription

1 KID, an operational challenge 10 October 2016

2 Agenda Coordination between Solvency II, MiFID and IDD How to deliver KID in time? Impacts for the Insurance industry How to adapt your process for PRIIPs KID, different possibilities Zoom on Risk, performance and cost sections 2

3 Coordination between Solvency II, MiFID and IDD Unit-linked policies & Investment funds Regulatory convergence and/or contamination A solid and long-term relationship: the historical evolution on the type of investments of unit-linked life insurance policies in Luxembourg shows a strong preference of investment funds as underlying assets. On average, from 2000 to 2014, they constitute 49% of unit-linked investments. Banks Distribution channels Investment Funds Distribution channels Insurance undertakings Insurance Distribution Directive Investment funds Bonds (both public and private issuers) MiFID II Conflict of interest - Commissions Equities Other (incl. debt obligations vs reinsurers) 100% Distribution UCITS Investment restrictions 90% 80% 70% Data Solvency II 60% 50% 49% 40% 30% PRIIPS 20% 10% 0% Original scope Impact Source: CAA Annual reports (2000 to 2014) 3

4 Agenda Coordination between Solvency II, MiFID and IDD How to deliver KID in time? Impacts for the Insurance industry How to adapt your process for PRIIPs KID, different possibilities Zoom on Risk, performance and cost sections 4

5 How to deliver KID in time? Observed scenarii and Macro planning for all possibilities A historical situation! 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): Macro planning for each scenario 10/16 01/17 06/17 01/18** Scenario 1 Scenario 2 Scenario 3 Scenario 4 How to anticipate the best? Product universe Graph Characteristics Chance Impact No delay Level 1 only No delay Use of rejected RTS No delay New RTS issued shortly X months delay New RTS Review investment universe Offering review Data collection Anticipate data collection Increase relationship with Asset managers Low Low Low High Customer experience Develop website Increase knowledge of intermediaries Customer protection Investment profile set-up Link IDD & PRIIPs Regulation analysis (new RTS* or level 1) TOM review Preparation Onboarding KID Factory Soft launch (testing, dry run, ) Go live Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 1 Scenario 2 Scenario 3 Scenario 4 * 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 5

6 How to deliver KID in time? Key success factors Key factors for a successful PRIIPs implementation Content creation (plain language, SRI, charges) Document Production (assembly and air traffic controls) Dissemination (distributors, regulator?) Web publishing (distributor s / policyholder s portal) 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 6

7 How to deliver KID in time? Multi level reuse of common narrative is key Anatomy of a KID Key focuses Initial focus Plain language Common elements Rationalization On-going maintenance Update of dynamic data (risk, charges, perf) Maintain consistency 4 5 Benefits Accelerate time to market Consistent look & feel, common language Reduced translation costs Accross all KID Contract s profile Conditional

8 How to deliver KID in time? Typical implementation steps DESIGN DIGITALISATION DISSEMINATION & PUBLICATION Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Marketing Design KID look & feel Marketing & Reporting Define publication format and rules Investment services Identify data sources & collect Investment risk Define risks calculations Reporting & IT System set-up: Database Compilation engine Graphic rendering engine Lessons learned Lessons learned Investment services Define dissemination format and rules All teams Review and validation Legal team Create plain language narrative for each investment policy Reporting & IT Test and set-up data transmission, transformation and collection controls Lessons learned 8

9 How to deliver KID in time? What we observed last months 1. Evaluate situation 2. Target operating model 3. Conduct RFP* 4. Plan implementation 5. Implementation Stress level Normal project Stressed project Regulatory analysis Document strategic direction and objectives Conduct value, profiling and benchmarking Develop and test strategic / financial assumptions 1. Conduct RFP Comparison of several offering of different nature (software, service provider) No scope clearly defined Long RFP period due to uncertainty of the model Conduct workshop with key stakeholders Define operating model (offering, distribution, process, orga., network etc.) Select KID option (generic, MOP, perso.) Prepare dataflows 2. Evaluate situation Assessment of the situation by taking into account the chosen provider Adapt financial needs Adopt process and methodology Define RFP guidelines Organize RFP Select provider or system Contract with software provider or external service provider 3. Implementation Conduct project On-going project management Regulatory compliance alert Participation to industry meetings 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 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 * If applicable 9

10 Agenda Coordination between Solvency II, MiFID and IDD How to deliver KID in time? Impacts for the Insurance industry How to adapt your process for PRIIPs KID, different possibilities Zoom on Risk, performance and cost sections 10

11 Impacts for the Insurance industry A A very very close relationship between actors Asset servicers Data quality Data availability Set-up interfaces Clients Profiling Litigation risk Risk of mis-understanding Increase comparability Insurance undertaking Cost pressure TOM to be defined Offering monitoring Documentation maintenance Distribution network Generic KID is not a differentiator Distributor training Adapt current distribution process Product Simplification Rationalization Unit-linked transition is jeopardized 11

12 Challenges for the Insurance industry General considerations Performance 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 Costs Risk 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) PowerPoint Timesaver 12

13 Agenda Coordination between Solvency II, MiFID and IDD How to deliver KID in time? Impacts for the Insurance industry How to adapt your process for PRIIPs KID, different possibilities Zoom on Risk, performance and cost sections 13

14 How to adapt your process for PRIIPs? Outsourced vs. internal solution Servicer Internal Low outsourcing Important outsourcing On premise KID Assembly outsourced Fully outsourced solution Narratives set-up Narratives set-up Narratives set-up Setup Translation coordination Insurer specifics Translation coordination Insurer specifics Translation coordination Insurer specifics Data acquisition from third parties Data acquisition from third parties Data acquisition from third parties Data management Data management Data management Risk, performance and costs calculation Risk, performance and costs calculation Risk, performance and costs calculation KID Production KID Production KID Production KID filing and safe-keeping KID filing and safe-keeping KID filing and safe-keeping Audit trail Audit trail Audit trail Trigger management & update Trigger management & update Trigger management & update Validation of new / updated KID Validation of new / updated KID Validation of new / updated KID Regulatory watch Regulatory watch Regulatory watch 14

15 How to adapt your process for PRIIPs? Process to be adapted: Organisational impacts* No impact Impact Distribution Underwriting Arbitrage / Switch Internal Audit BoD Approved director (CEO) Legal KID maintenance Annual review Change of the Investment strategy Head of Risk & Compliance Risk & Compliance team Operations (COO) Policy administration IT (CIO) Operations (run) Business dev. (CCO) Business development Finance and support (CFO) Accounting Investment services Infrastructure New project management HR New Investment support Change of the Asset manager Change of the Investment profile Client relationship management Reporting & quality assurance Maintenance Administration & logistics * Typical organisation 15

16 Agenda Coordination between Solvency II, MiFID and IDD How to deliver KID in time? Impacts for the Insurance industry How to adapt your process for PRIIPs KID, different possibilities Zoom on Risk, performance and cost sections 16

17 KID Different possibilities Depending on product typology - Competition pressure + Competition pressure - Personalization level + Personalization level - Cost customization + Cost customization - KID production volume + Contracts = Generic KID Segment definition 1 contract = 1 KID 17

18 KID Different possibilities Three scenarios in a nutshell Scenario 1-1 KID per contract Scenario 2-1 KID per profile Scenario 3-1 generic KID - X specific «Mini KID» or or + Production of a single KID about the overall PRIIP (including the chosen investment option) 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 A switch from one scenario to the other may also be envisaged All scenario are permissible as per the RTS 18

19 KID Different possibilities One KID per contract The choice of providing One KID pe r contract imp lies a series of act ivities to carry out, st arting with an in -depth analysis of each single contract and proceeding with the identification and collection of the needed information. Analysing in-depth each single contract Managing unquoted assets and other peculiarities Retrieving all impacting costs / fees Managing country and language specificities Identifying the investment strategy Benchmark assignment 19

20 KID Different possibilities One KID per profile The choice of providing O ne K ID pe r profile implies a fundamental preliminary activit y aimed at grouping the bulk of securities at Asset Manager level so as to detect common profiles and reduce the number of KID to be produced KID at Asset Manager level (e.g. UCITS, direct lines, etc.) 500 KID grouped by cost structure 1 st grouping criteria (e.g. cost structure) 250 KID grouped by investment strategy 2 nd grouping criteria (e.g. investment strategy) 250 KID profile-based to produce in place of 1000 Please, notice that the example here above provided is for illustration purposes 20

21 KID Different possibilities Generic + Mini-KID The choic e of providing Generic KID + Mini-KID implies the definition of the ass ets subjects to Mini- KID (i.e. ext ernal funds, guarant eed int erest rat e with profit sharing, intern al ded ic ated funds, internal collective funds, direct securit ies lin es, etc.), the defin ition of each section of the gen er ic KID and a structur ed aggr egation of all the ident ified information so as to produce and deliver a fully compliant KID. Structured aggregation of the information to form the final KID Analysis of volume and variety of KID to produce, also aimed to detect technical constraints Definition of all the assets subjects to the Mini-KID Definition of each single section of the generic KID Approach supported by most French Insurance Undertakings 21

22 KID Different possibilities Scenario 3 in details KID 1: Generic KID KID X: Mini KID What is this product? 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 Risks & Return? 4 Explain that the risks and returns of a retail investor depend on its choice of underlying investment options Costs? 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 Comprehension alert 4 You are about to purchase a product that is not simple and may be difficult to understand. Risk classification 4 Show the range of the lowest and highest risk classifications of the underlying investment options Performance indicator 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 Cost indicator 4 Show the range of the recurring and incidental costs for the PRIIP and its underlying investment options Investment objectives 4 Same information that are required within the What is this product? section. SRI 4 Same information that are required within the What are the risks and what could I get in return? section. Performance scenarios 4 Same information that are required within the Performance scenarios section. Costs 4 Same information that are required within the What are the costs? section. 22

23 Agenda Coordination between Solvency II, MiFID and IDD How to deliver KID in time? Impacts for the Insurance industry How to adapt your process for PRIIPs KID, different possibilities Zoom on Risk, performance and cost sections 23

24 SRI, performance and cost measures Scenario 1 Valorisation frequency higher than monthly External N.A. Internal Both Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 Scenario 7 Scenario 8 Scenario 9 Scenario 10 Guaranteed interest rate with profit sharing External funds - traditional assets External funds - structured products 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 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 S1; S10 S3; S7 S4; S8; S9 S2; S5; S6; S11 Cat. 1 Cat. 2 Cat. 3 Cat. 4 Scenario 11 Internal funds and FAS Pure private equity 24

25 SRI, performance and cost measures SRI MRM Market Risk Measure PRIIPs can be assigned to 7 MRM classes and for this purpose they are divided into 4 categories Example of PRIIPs classificationaccording 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 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. + CRM Credit Risk Measure Credit risk shall be assessed when the return on the investment depends on the creditworthiness of manufacturer or the party bound to make the relevant payment to the investor On AIFs and UCITS (ne t of exceptions) credit risk shall not be assessed PRIIPs manufacturer de fines ex -ante one or more credit rating agencies, whose credit assessment constitutes the reference for the CRM assignment Credit risk level of each relevant obligor shall be assessed : in case of credit risk assessed at differe nt layers, all exposures are separately evaluated, per layer, and the credit risk assigned is the highest one Quality step Credit Risk class Rating Class 0 CR1 AA / AAA 1 CR1 AA 2 CR2 A 3 CR3 BBB 4 CR4 BB 5 CR5 B 6 CR6 CCC = SRI Aggregation to a single SRI SRI is a guide to the product s level of risk, helping the investor to assess it and compare it wi th other products It takes into account how likely the investor can lose money and the possibility to enter some form of protection Credit Risk Market Risk MR1 MR2 MR3 MR4 MR5 MR6 MR7 CR CR CR CR CR CR Liquidity Risk : for products tradable over their li fe but for which no regulated liquid market exists, a warning shall be i ncluded within the SRI, hi ghlighting that selling the PRIIP before 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 adequately captured by the indicator Other warnings : if issues on cashing-in before maturity or currency risks exist, they shall be properly mentioned and described 25

26 SRI, performance and cost measures Determining the unfavourable, moderate and favourable scenarios The moderate scenario shall be the value of the PRIIP at the 50th percentile. Calculation of expected values for intermediate holding periods 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. 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. 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. 26

27 SRI, performance and cost measures 3 scenario: unfavourable, moderate and favourable 1 Unfavourable Scenario Highlights the features of the product and the economic conditions which could give rise to an unfavourable outcome for the retail investor 2 3 Moderate Scenario Highlights the features of the product and the economic conditions which could give rise to an moderate outcome for the retail investor Favourable Scenario Highlights the features of the product and the economic conditions which could give rise to an favourable outcome for the retail investor Fair, accurate, clear and not misleading presentation to enable the retail investor to understand possible outcomes under different market conditions Each scenario accompanied by a narrative text (indicating, where applicable, conditions for returns to retail investors or performance caps) Information presented at the Recommended holding period (and for two interim periods, unless the product is considered 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 the Recommended 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 theones on theannual rates of return of theunderlying assets) For insu rance-based PRIIPs, the three scenarios shall be calculated considering that no payments resulting from i nsurance coverage occur during t he holdi ng period. Notwithstanding, an additional 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. 27

28 SRI, performance and cost measures Costs measures 1 COMPOSITION OF COSTS Static data, obtained ex-post, backward looking One-off costs Recurring costs Incidental costs % Entry costs % Exit costs % Portfolio transaction costs per year % Insurance costs % Other ongoing cost % 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 2 SUMMARY COST INDICATOR REDUCTION IN YIELD (RIY) 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 Fair value of the products shallbe determined on market prices, internal pricingmodels (comparable approach or market-to-model) Cost disclosurestructuresimilartomifidii (and substantiallydifferent then for UCITSKIID) Costs are strictly related tothe product in point; other costs chargedby advising/selling personsare not shown Message to display: figures are partially based on data from the past and thus may change in the future 28

29 Thank you for your attention! 29

30 Contacts Thierry Flamand Florent Anders Alexandre Schneider Partner Insurance leader Senior Consultant Consultant