Global Insurance CFO Survey Asia supplement

Global Insurance CFO Survey Asia supplement

Contents 1 Introduction 3 Executive summary 5 Priorities and challenges 16 Delivering value in 2020 20 Looking forward

Introduction EY s CFO survey of 35 global insurers across 10 leading insurance markets (the global survey) captured the priorities and challenges for finance and actuarial teams as they seek to support business growth strategies, while addressing ongoing regulatory and cost pressures (a copy of the full survey report can be downloaded from the EY website: www.ey.com). This white paper focuses exclusively on the survey results of the nine multinational corporations (MNCs) operating across Asia and the one major domestic life insurer in mainland China who participated in the survey, and also captures additional insights gained by interviewing EY Assurance and Advisory partners in mainland China (China), Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. Global Insurance CFO Survey Asia supplement 1

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Executive summary Insurance companies in Asia (whether multinational or domestic) are faced with a similar set of business drivers and challenges to those their peers in Europe and North America are facing. Over the coming years, changes emanating from North America and Europe will lead to insurers in Asia implementing new financial and regulatory reporting requirements, such as International Financial Reporting Standards (IFRS) 4 Phase II, IFRS 9 and risk-based capital (RBC). We expect that these will preoccupy finance and actuarial teams at various stages throughout the next five years and, naturally, will bring about some challenges in striking a balance between delivering value to the business and meeting reporting demands. Our experience with European insurers having to comply with Solvency II was that it placed an increasing amount of pressure on both the finance and actuarial functions, as well as the infrastructure that supported them. It appears that the challenge of ongoing change will continue for insurers over the coming years. Of the 10 insurers whose survey results are included in this white paper (the cohort), respondents ranked challenges in data, technology and people as the top three, and some insurers already seem to have improvement plans in place to address their specific challenges. Of the cohort, 70% said they have launched improvement projects, while said they are in the planning stage and said they have the right capabilities in place. Across the region, we believe that between 30% and 70% of insurers have recognized that investment is required, and planning is underway. Given this and our own interaction with insurers, we believe there is still some way to go. Based on the survey results of the cohort, the imperatives for finance, risk and actuarial organizations in Asia are clear: fix the reporting processes, understand functional interdependencies, enhance value-add to the business, develop and deliver detailed training programs and achieve the right level of documentation and operating manuals so that knowledge is institutionalized. To achieve these imperatives, changes will be required to all aspects of the finance target operating model (TOM). Ensuring changes are aligned to an agreed target state (that integrates with both risk and actuarial) and implemented in a logical sequence will be critical. Global Insurance CFO Survey Asia supplement 3

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Priorities and challenges Based on the CFO survey results of the cohort, our major findings are highlighted below: 80% of the cohort rank implementing new regulatory and financial reporting requirements among their top three priorities for the next five years. 70% 40% 80% 70% of the cohort rank being a better business partner among their top three priorities for the next five years. of the cohort cite responding to regulatory change as the number one business driver, with 80% of participants ranking regulatory change among the top three business drivers. of the cohort rank data and technology issues among the top three challenges facing the finance and actuarial departments. of the cohort have launched improvement projects, while are in the planning stage and said they have the right capabilities in place. Global Insurance CFO Survey Asia supplement 5

Primary business drivers Survey question: Please rank in order the following business drivers facing your organization through 2020. Figure 1: Percent of cohort ranking the driver among their top three Responding to regulatory change 40% 40% 80% Achieving growth, expanding into markets and/or expanding through M&A activity 30% 60% 30% 50% Improving capital and liquidity position 40% 30% Establishing risk mitigation and management 30% 30% and new market entrants Preparing for leadership change and succession Order of priority: First Second Third Source: EY research, 2014 6

Of the cohort, four rank regulatory change as the number one business driver, while three rank regulatory change in second place. Across Asia, six markets ranked responding to regulatory change in first place, while four markets ranked growth as their highest priority. The top three primary business drivers by Asian market are included in the table below: Figure 2: Top three business drivers by Asian market Market First priority Second priority Third priority Hong Kong Responding to regulatory change Achieving growth, expanding into markets and/or expanding through M&A activity Singapore Achieving growth (or maintaining market share), expanding into markets and/or expanding through M&A activity Responding to regulatory change China Achieving growth, expanding into markets and/or expanding through M&A activity Responding to regulatory change Indonesia Responding to regulatory change Achieving growth, expanding into markets and/or expanding through M&A activity South Korea Responding to regulatory change Achieving growth, expanding into markets and/or expanding through M&A activity Malaysia Responding to regulatory change Relieving pressure on costs and margin/improving profit Philippines Responding to regulatory change Achieving growth, expanding into markets and/or expanding through M&A activity Taiwan Responding to regulatory change Establishing risk mitigation and management Thailand Vietnam Achieving growth, expanding into markets and/or expanding through M&A activity Achieving growth, expanding into markets and/or expanding through M&A activity Responding to regulatory change Relieving pressure on costs and margin/improving profit Relieving pressure on costs and margin/improving profit Relieving pressure on costs and margin/improving profit Relieving pressure on costs and margin/improving profit Relieving pressure on costs and margin/improving profit Relieving pressure on costs and margin/improving profit Achieving growth, expanding into markets and/or expanding through M&A activity Increasing simplification through organizational restructuring Improving capital and liquidity position Relieving pressure on costs and margin/improving profit Responding to regulatory change Source: EY research, 2015 Global Insurance CFO Survey Asia supplement 7

In the next five years, the global insurance industry will continue to see significant regulatory and reporting change, with the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) both proposing changes to accounting for insurance contracts, and the replacement of the IASB s IAS 39 with IFRS 9 Financial Instruments, and Solvency II (for European insurers) coming into effect. MNCs will have to comply with the regulatory requirements of their parent companies in the Americas and Europe, as well as in-market local demands. Most notably, a number of regulators are either introducing some form of RBC or are revisiting their existing RBC frameworks. For example, Singapore and Thailand are consulting with the industry on second-generation RBC frameworks, while others, such as mainland China with its C-ROSS and Hong Kong, are also considering moving in that direction. As shown in figure 3 below, it will be a very busy few years ahead. In our view, compliance costs will continue to rise. Improving economies are stimulating new growth strategies for insurers; however, coupled with this are growing regulatory demands and competitive pressures. While the survey results indicate a growing confidence in Asian economies and that growth will be a primary driver, a balance with cost control and regulatory rigidity will be needed. 2013 2014 2015 2016 2017 2018 2019 Annual reports Quarterly reports Potential IFRS 4 Phase II Potential IFRS 4 Phase II start 22 weeks 20 weeks 7 weeks 6 weeks China C-ROSS transitional Malaysia Philippines Singapore South Korea operational risk ORSA Incl. longevity risk Source: EY research, 2015 8

Finance and actuarial priorities for 2020 Survey question: Please rank in order the following finance and actuarial priorities facing your organization through 2020. Figure 4: Percent of cohort ranking the driver among their top three requirements (includes accounting pronouncement) 50% 80% Being a better business partner (understanding the business, improved decision support) 40% 70% 40% 30% 30% 30% Order of priority: First Second Third Source: EY research, 2014 Among the cohort of 10, 8 ranked implementing new regulatory and financial reporting requirements in the top three finance and actuarial priorities, with 5 ranking it as their highest priority. Overall, being a better partner ranked in second place among the 10 insurers, while it ranked in first place in the global survey. This would indicate that new regulations and financial reporting standards are expected to demand more resources (in terms of both cost and human effort) from MNCs operating in Asia over the next five years, when compared to their peers with most of their operations in Europe or North America. Implementing new regulatory and financial reporting requirements was ranked in first place in 9 out of 10 Asian markets, with IFRS changes and second generation RBC frameworks among the reasons cited. Global Insurance CFO Survey Asia supplement 9

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The top 3 finance and actuarial priorities by Asian market are included in the table below. Figure 5: Top three finance and actuarial priorities by Asian market Market First priority Second priority Third priority Hong Kong Implementing new regulatory and financial reporting Being a better business partner Aligning finance, risk and actuarial information Singapore Implementing new regulatory and financial reporting Being a better business partner Aligning finance, risk and actuarial information China Implementing new regulatory and financial reporting Being a better business partner Aligning finance, risk and actuarial information Indonesia Implementing new regulatory and financial reporting Setting up finance to support growth Reducing total/relative cost to operate finance South Korea Implementing new regulatory and financial reporting Improving quality of reporting Setting up finance to support growth Malaysia Implementing new regulatory and financial reporting Reducing total/relative cost to operate finance Improving quality of reporting Philippines Implementing new regulatory and financial reporting Improving quality of reporting Being a better business partner Taiwan Implementing new regulatory and financial reporting Aligning finance, risk and actuarial information Improving quality of reporting Thailand Implementing new regulatory and financial reporting Improving quality of reporting Being a better business partner Vietnam Improving quality of reporting Being a better business partner Setting up finance to support growth Source: EY research, 2015 Across Asia, being a better business partner was ranked in second place for insurers in Hong Kong, mainland China, Singapore and Vietnam while the respondents in Thailand and the Philippines ranked it third. Improving the quality of reporting was ranked first for Vietnam, while respondents in Thailand and the Philippines rated it second, and Taiwan and Malaysia ranked it as the third priority. In Vietnam, we see that many domestic players are looking for foreign strategic shareholders and thus need to improve the quality of their reporting. In our experience, reporting processes among insurers in Asia can be inflexible, often with time-consuming manual workarounds. Some insurers have already begun to address this, as well as the lack of transparency and clarity in their reporting processes. However, given the likelihood of continual changes, we expect increased reporting over the coming years. Global Insurance CFO Survey Asia supplement 11

Utilization of shared services is expected to increase, although reducing the cost to operate finance may not be the primary driver Survey question: Which of the following processes within your finance and actuarial organizations are performed locally, or are shared services or outsourced today? What is expected in 2020? Figure 6: Expected utilization of shared services for the cohort Transaction processing Local Shared services Outsourced Accounts payable and expense reimbursement Actuarial reserving and valuation Cost management Fixed asset accounting General accounting Payroll Revenue accounting Taxes Treasury Reporting Internal and external reporting communications Communications Decision support Planning, budgeting and forecasting Performance analysis and decision support Capital management Controls Policy, procedures and controls Internal audit Finance function management Finance HR Finance IT Denotes a change of 10 percentage points or more in either direction Source: EY research, 2014 Reducing the cost of finance did not rank as a particularly high priority for most of the cohort, with only two participants ranking it in the top three. Utilization of shared services by the cohort is expected to increase in most finance process areas, with priorities such as delivering finance services consistently, setting up finance to support growth, and improving the quality of reporting being more likely shared services objectives. 12

Challenges facing finance and actuarial organizations Survey question: Please rank in order the main challenges finance and actuarial organizations will need to address to become better business partners and fully participate in the execution of business strategy. Figure 7: Percent of cohort ranking the challenge among their top three Data quality/granularity not synchronized with needs 40% 30% 90% 50% 30% 80% 30% 60% 40% Organization decentralized organization/ Order of priority: First Second Third Source: EY research, 2014 Global Insurance CFO Survey Asia supplement 13

Data, technology and people present the biggest challenges to finance In the global survey, data, technology and people were the top three challenges faced by finance and actuarial functions, and the survey results of the cohort identify the same challenges as the top three, with half of the cohort citing technology as their biggest challenge. Across Asia, where life insurance is typically dominated by MNCs and general insurance by domestic companies, data was ranked as the biggest challenge in Hong Kong, the Philippines and Vietnam, while technology was ranked as the greatest challenge in Malaysia, Singapore, South Korea and Taiwan. Our research also found that for the domestic insurers, talent and resourcing people is the biggest challenge, as is the case in China, Indonesia, Thailand, the Philippines and Vietnam. Countries such as Vietnam, with relatively low insurance penetration and density, are attractive to new entrants, and this intensifies the competition for qualified people. In the Philippines, the shortage of skilled people is made worse by the number of shared service centers located in the country, and these units of MNCs typically offer better pay than local companies. However, the increase in demand for people had been anticipated and plans put in place to increase supply. Staff movements between insurers are frequent. In order to train, retain and increase the depth of technical skills, companies require a greater focus on knowledge-transfer and training. The top three finance and actuarial challenges by Asian market are included in the table below. Figure 8: Top three challenges facing finance and actuarial organizations by Asian market Market First priority Second priority Third priority Hong Kong Data quality/granularity Technology infrastructure People lack of/quality Singapore Technology infrastructure Data quality/granularity People lack of/quality China People lack of/quality Data quality/granularity Technology infrastructure Indonesia People lack of/quality Data quality/granularity Technology infrastructure South Korea Technology infrastructure Data quality/granularity People lack of/quality Malaysia Technology infrastructure Data quality/granularity People lack of/quality Philippines (domestic) People lack of/quality Technology infrastructure Data quality/granularity Philippines (MNC) Data quality/granularity Technology infrastructure People lack of/quality Taiwan Technology infrastructure Data quality/granularity People lack of/quality Thailand People lack of/quality Data quality/granularity Technology infrastructure Vietnam (domestic) People lack of/quality Technology infrastructure Data quality/granularity Vietnam (MNC) Data quality/granularity People lack of/quality Technology infrastructure Source: EY research, 2015 14

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Delivering value in 2020 Transaction processing and decision support functions will undergo the greatest transition from their current configuration to the expected future state In the survey, participants were asked to rank their company s level of maturity across five finance progress groups both today and where they expect to be in 2020. Based on the results for the cohort, decision support received the lowest current score and one of the highest expected maturity levels in 2020, thus revealing the biggest capability gap. In addition, transaction processing was also seen to be one of the weaker finance capabilities for the cohort, with respondents identifying a need to get to an advanced maturity level by 2020. Survey question: For each finance process group, please rate the current and expected (2020) levels of maturity within your finance and actuarial organizations. Average maturity level Basic Developing Established Advanced Leading 2014 2020 Reporting Controls 2014 average maturity 2020 average maturity 2014 range 2020 range Source: EY research, 2014 16

Across the region, Hong Kong, Singapore and South Korea indicated that transaction processing requires the greatest improvement in maturity level through to 2020, with 6 of the 10 Asian markets citing reporting as the function that required the greatest improvement. Nine out of the 10 Asian markets indicated that decision support capability requires a significant improvement through to 2020, with 6 out of the 10 markets ranking controls in the top 3. The functions requiring the greatest improvement in maturity by Asian market are included in the table below. Figure 10: Functions requiring the most improvement in maturity by Asian market Market First priority Second priority Third priority Hong Kong Transaction processing Decision support Controls Singapore Transaction processing Decision support Reporting China Reporting Decision support Controls Indonesia Reporting Decision support Controls South Korea Transaction processing Decision support Reporting Malaysia Decision support Reporting Transaction processing Philippines Reporting Decision support Transaction processing Taiwan Reporting Decision support Controls Thailand Reporting Decision support Controls Vietnam Reporting Controls Transaction processing Source: EY research, 2015 Global Insurance CFO Survey Asia supplement 17

Data, processes and technology need most improvement to meet 2020 needs Across the range of organizational capabilities, data was identified by the cohort as having the largest gap between current maturity levels and the level of maturity required to meet 2020 finance and actuarial objectives. Respondents current ratings range from developing to advanced, indicating substantial variety within the cohort. Scope for improvement exists for process as well, where some respondents listed their current maturity level as developing, whereas others identified it as leading. In addition, the cohort listed their current maturity for technology in a range from basic to advanced, with a target maturity level ranging from established to leading. This highlights the difference between those who have already invested in new platforms and those who have yet to do so, and that in some organizations, technology requires significant improvement to meet 2020 needs. Among the cohort, governance was identified as the most established capability in 2014, but indicated a need for people capabilities to improve significantly through to 2020. Survey question: For each capability below, please rate the current level of maturity within your finance and actuarial organizations and the level of maturity required to meet the objectives of your finance and actuarial organizations through 2020. Average maturity level Basic Developing Established Advanced Leading Operation strategy 2014 2020 Organization Data People 2014 average maturity 2020 average maturity 2014 range 2020 range Source: EY research, 2014 18

Across the region, 5 out of the 10 Asian markets ranked people as the capability needing the greatest improvement through to 2020, with 3 markets indicating that data required the biggest improvement, and with technology and processes each being ranked in first place by 1 of the markets. The capabilities requiring the greatest improvement in maturity by Asian market are included in the table on the right. Figure 12: Capabilities requiring the most improvement in maturity by Asian market Market First priority Second priority Third priority Hong Kong Data Processes Technology Singapore Data Processes Technology China People Data Technology Indonesia People Data Technology South Korea Data Processes Technology Malaysia Processes Data Technology Philippines People Data Technology Taiwan Technology People Data Thailand People Technology Data Vietnam People Technology Data Source: EY research, 2015 Global Insurance CFO Survey Asia supplement 19

Looking forward Looking forward, new or increased regulatory reporting requirements, such as SII, RBC and IFRS 4 Phase 2, will demand an integrated approach to ensure reports are delivered on time and multiple reporting bases can be fully reconciled. Existing issues around data quality, obsolete technology and inconsistent processes will need to be addressed as the new requirements are implemented. Insurers should start improvement projects in the near future, and there may well be benefits to gain in terms of first-mover advantage. As indicated by our cohort, 90% have already launched a finance change program or are in the planning stages of change initiatives in order to meet business demands (see Figure 13 below). Survey question: Where are you in your finance and actuarial planning to address the top five priorities? Figure 13: Change program activity, percent of cohort 70% 20

EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2015 EYGM Limited. All Rights Reserved. EYG no: EG0252 1505-1454655 NY ED None Asia contacts Asia Pacific Jonathan Zhao +852 2846 9023 jonathan.zhao@hk.ey.com ASEAN Esther See +65 6309 6182 esther.see@sg.ey.com Greater China Phil Gough +852 2846 9778 phil.gough@hk.ey.com South Korea Yong Joo Han +82 2 3787 6515 yong-joo.han@kr.ey.com This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.