IDC Financial Insights Community > Institutional FinTech Focus

Solvency II: The Captive Insurance Industry's Pragmatic Approach

Wed, 30 Jun 2010 13:33:29 +0000

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This week over 500 professionals representing insurance companies, banks and vendors convened the 6^th annual Bermuda Captive Conference. For business entities "captive" insurance subsidiaries are used to insure and reinsure business activities of a parent company. The concept of a captive insurance company was developed in the early 1960s and there are approximately 5,000 captives worldwide. Bermuda has a long tradition of being home to many. According to the 2010 Bermuda Insurance Survey, the top 10 captives have assets in excess of $500 Billion dollars and report earned premiums of approximately $27 Billion. This conference was well attended and top discussion issues both in general sessions and the hallways were of the impacts of the impending Solvency II requirements, increased requirements for economic capital, integrated regulatory supervision and the balance between quantitative and qualitative enterprise risk management. While the captive insurance industry is a small segment of the global insurance industry, it has analogous implications for how the industry is approaching regulatory changes and the realities of revised economic capital requirements.

New Solvency II requirements will bring material change to all sectors of the insurance industry. One of the immediate ramifications will be the need for insurance concerns to set aside increased amounts of economic capital. One expert opinion estimated the average increase in economic capital to be 4 times the MCR or minimal capital requirement. Pillar 1 of Solvency II calls for revised quantitative analysis to establish a firm's solvency and minimal capital based on the risk profile of the company's assets and business model. Representatives from the Bermudian government that included the Minister of Finance and Deputy Minister in charge of regulation discussed at length their objectives of taking a leadership position in a pragmatic manner that considers operational, market and credit risks of the firm's business model. In addition, a new regulatory approach will consider what is called "group wide" analysis where a parent may have disparate lines of business being insured or reinsured by the captive. However, there was some industry dissent with regard to impending regulatory adjustments. The issue was raised by a "C level" executive who stated that by and large the insurance industry survived the 2009 financial crisis and that in of itself was an incredible example of the ultimate "stress test".

As the captive insurance industry moves towards complying with and leveraging new Solvency II regulation, vendors will need to step forward with technology solutions that in addition to hardware, focus on software and services solutions. The primary need for the industry seems to be on outsourcing for services in enterprise risk management areas that include business activities around analysis, actuarial sciences and various internal audit mechanisms. In addition, as one speaker indicated, technology, services and investment management firms will be stepping forward with solutions on quantitative and qualitative risk analysis to help manage the volatility of portfolios.

One of my business findings from this conference is that this sub-segment of the insurance industry is taking a pragmatic and cooperative approach to the new realities of regulation. The new realities will be the need for greater economic capital as a cost, but also looking towards the gained knowledge from the framework to become a business lever over time. As time moves on, IDC Financial Insights will be tracking the roll out of Solvency II in October of 2012. As well, we will be studying the business and technology impacts within our global risk management and insurance practice tying together the business issues with technology implications.

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Keywords

Insurance, Re-insurance, Risk, Risk Management, Finance

The Linkage Between Credit and Treasury Services (4 Comments)

Tue, 16 Mar 2010 18:22:37 +0000

Entry by Jeanne Capachin

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Since the start of the financial crisis, there have been dramatic changes in corporate banking relationships. The link between credit and treasury services business is not new, however, it is much stronger than in previous years.

This trend is one of the results discussed in the new research report,

Business Strategy: Corporate Treasurers and Buying Behavior — Treasury and Transaction Services, FIN 222237, produced by IDC Financial Insights and Treasury Strategies, Inc.

On average, 72% of the transaction banking wallet is determined by credit spend. Nearly two-thirds of buyers are credit driven. Of these credit-driven buyers, roughly half spend 90% or more of their transaction banking wallet solely with their credit providers.

It’s easy to look at these findings and decide to focus on credit relationships in order to grow your transaction business. However, we see this trend as unusual and temporary. Any business won under current conditions will be at risk when credit markets stabilize and corporates place less importance on credit.

Outside of credit, a bank’s footprint and stability are the most important selection criteria for corporates. In the last few deals you’ve won, what have been the driving criteria for your clients?

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Keywords

treasury, credit, banking, corporate, commercial, wholesale

2010 Capital Markets reform will be more bark than bite.

Mon, 11 Jan 2010 20:20:16 +0000

Entry by Sean O'Dowd

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If you weren't able to join us on our 2010 predictions webcast today, I wanted to at least share one of the predictions, specifically for Capital Markets, that I spoke to. I talked about capital markets reform being more bark than bite.

Reform and regulation has continually been called for over the past year and half and is still needed going forward. There are, however, a number of factors that I see working against substantial progress that leaves regulators falling short on any meaningful or substantial reform law in 2010.

Some of the main obstacles I see are the following:

Firstly, an unorganized SEC: SEC chairman Mary Schapiro is having a difficult time getting proposals passed and when they are it is typically in some diminished fashion. For example, after failing to uncover the Madoff scheme, it was proposed that 10,000 fund managers would be subject to surprise inspections. The outcome however was far short of the proposals original ambitions - whereby only 1,600 fund managers are subject to unannounced audits. Overall, some of the other factors here are the very large number of proposals the SEC has to work through, a tarnished image that undermines its effectiveness and a lack of political currency to really push through tougher reform.

Another hurdle is Washington's political jockeying: While the SEC and CFTC have actually come together to discuss OTC derivatives and other reform measures, the progress to date has been largely on discussing the two agencies differences rather than any offering any proposals. There continues to be political wrangling between various government agencies that hamper them from working well together or successfully being combined into a new regulatory interagency council.

Also lobbying and industry pushback presents a large obstacle: As one would expect there is always strong opposition to reform from industry firms. What we've seen is that during the public comment periods for various proposals, financial firms have waged a reasonably successful response strategy that has helped pare back the severity of some proposals.

So the net results of these obstacles are watered down, niche proposals and overall a lack of actual reform law. To this end, we do not see any major reform being passed over 2010 that will dramatically alter status quo. The main objectives of the reform and there likely outcome will be increased levels of reporting as opposed to major market structure, product, service or business operation changes.

We'll be watching these proposals carefully. There continues to be big talk about how the hammer is going to drop. And in the off chance that a surprise law change is made, we would expect it to target electronic trading practices. Specifically, the areas to keep an eye on over 2010 are proximity hosting and collocation practices, flash order bans, and greater dark pool transparency. Beyond this there is also consideration for changes that could be made to Reg ATS and Reg NMS in the form of new short-selling disclosure rules, and new uptick or circuit breaker rules. Capital markets firm are certainly content with stalled reform changes. I might also add that it's good that regulators are taking a slower approach, albeit not necessarily on purpose, and trying to force through hysterical legislation like Sarbox, which becomes a costly reporting reform measures at best that has not sustainably changed much.

Corporate Treasury Survey - Focus on Financial Institutions

Wed, 25 Nov 2009 18:35:38 +0000

Entry by Jeanne Capachin

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The AFP Exchange Magazine that landed in my mailbox today contains an article about cash management in 2009 and 2010, which is based on interviews with six corporate treasurers. Not surprisingly, the conversations with this group align completely with the research we did earlier this year - counterparty risk overshadows all other concerns, cash forecasting must be improved, banking relationships will change as rates rise and FDIC coverage changes, and the need for efficiency is greater than ever as expectations of treasurers and their staff increase. Looking forward to 2010, this group plans to rationalize banking relationships, continue to focus on safety and soundness, and invest in technology to improve efficiency.

As you all plan for the future, I know that one big question is how corporate treasurers' plans will impact financial institutions and technology providers. We've just closed out our next survey of corporate treasurers. We're examining the competitive issues banks are now facing as their corporate clients switch providers and look for new solutions - one year into the financial crisis. I'll be analyzing responses over the coming weeks, and can provide a preview here of the focus and breadth of this research. For this survey, we reached out to not only treasurers, but also financial institutions and technology providers to gather different points of view. The intent of this research is to identify trends regarding financial institution relationships, for instance:

for businesses seeking additional credit, what sources are most likely to gain their business and what is driving their need for credit?
which institutions are gaining and losing banking relationships?
are treasurers consolidating business again?
how are concerns about counter-party risk impacting decision-making?

This is our most comprehensive survey yet of North American treasurers, and thanks to those treasurers who took the time to compete our surveys, we've got some great information about specific institutions and overall trends that we can report out to our clients. In the meantime, do you have any thoughts about what 2010 will bring to the world of corporate treasury services?

Keywords

treasury, banking, credit

2009 FinTech Rankings Reveal A Silver Lining

Fri, 30 Oct 2009 15:31:46 +0000

Entry by Dana Wiklund

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The annual survey of technology companies driving solutions into the global financial services industry has been completed and has yielded a silver lining to what otherwise could be classified as an unprecedented year of stress and capital rationing.

IDC Financial Insights has analyzed over 300 technology companies globally to determine what their revenues are for sales of hardware, software and services into financial services institutions, then ranked them according to industry position on that basis. This study does not include revenues derived from sales of data or telecommunications networking solutions.

Astounding in this economic environment is that as an aggregate group, the FinTech 100 companies experienced growth year over year in revenue. It is important to point out that revenues included in this ranking are from 2008, so we may see the full brunt of the economic meltdown in next year's rankings. But still, 2008 was tough year as well, especially since the last quarter of 2008 was when financial markets were almost completely seized up. Not quite conversely, but also in a positive vein, the Enterprise 25 aggregate group of companies had flat revenues year over year. The difference between a FinTech 100 and an Enterprise 25 company is that FinTech 100 companies receive over one third of their revenues from financial services.

The silver lining is that while we are in a global economic environment that features varying degrees of recession and slow growth along with fear of capital expenditure on the part of all financial institutions, investments are being made. That bears repeating, financial institutions amidst the mayhem are continuing to make investments towards a more positive future. Looking forward, financial institutions that survive will further maximize value from existing customers, ramp up their risk management and regulatory compliance capabilities, and begin to redefine their business models in how they approach their markets. For the FinTech 100 group of solutions providers this silver lining represents growth of $10 Billion growth in spend on technology or about 15%.

To find out more about this years FinTech analysis, follow this link: http://www.americanbanker.com/fintech100/

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Too much risk in Indian Outsourcing? (1 Comment)

Mon, 15 Jun 2009 12:16:08 +0000

Entry by Dana Wiklund

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A number of companies are closing software development and customer call centers in India by selling the local resources – systems and human infrastructure to offshore consulting companies and then signing multi year contracts for services. Is this the end of an era in off-shoring of programming and customer service work to India as we have known it?

Risk can be defined as "variances in financial outcomes". Risk does not always mean a negative outcome, but most often that’s the connotation. Risk is planning for a specific operational, market or financial outcome and then having the results vary from that, usually to the detriment of the organization. When outsourcing to India first came into vogue, companies rushed to set up captive centers where cheaper infrastructure and highly intelligent human capital created a financial advantage. Financial services companies at one point could hire senior level analysts for a fraction of their U.S. counterparts, creating a material cost advantage. What followed was a gold rush to tap into programming and analytic resources and adjust onshore operations to having tasks completed from a distance and on a 12-hour offset time schedule.

The truth is that managing any kind of resources which are remote in time and distance is difficult. Multitudes of companies discovered a resource arbitrage in India – a market pricing imperfection in the cost of labor. Like all arbitrages as the gap in pricing closes as demand for the cheaper resources increases. Think of the adjustments in the Indian outsourcing market in two veins. One is that of a slow motion closure of a labor arbitrage and the other as removing assets from companies balance sheets. The closure of the labor arbitrage is occurring because the true cost of outsourcing programming and customer service work offshore was higher than first anticipated or as time has moved on demand for these offshore resources has naturally eroded cost advantages.

Companies are also looking at assets offshore that are open to financial and sovereign risk and questioning how they can reduce variances around these costs. One option is to sell that building and lease it back from a property manager – a trend that has been ongoing for many years with commercial real estate. Companies are now reducing their risk of having their own offshore programming and customer service centers in favor of selling the assets to companies like Tata Consulting and Wipro and signing long term contracts to buy the services from in-country firms. These in-country firms will now have the responsibility of managing issues such as high turnover of employees, infrastructure and variable costs of labor and materials locally. For the firms selling these resources and leasing them back, their risks are reduced in that their financial outcomes are hedged – made more certain through contracts and service level agreements. Financial and operational risk are reduced.

All in this trend by U.S. financial services companies to shed offshore captive resources and sign longer term contracts with foreign companies is a smart risk management move in a world that has increased levels of instability and labor and materials "arbitrages" which are prone to be shorter lived, thus harder to leverage for any period of time. This re-shaping of the market is an opportunities for companies like Wipro and Tata to diversify their business models and construct long term agreements with U.S. companies to manage onshore resources – in a sense a reduction in risk to their business models by removing variances in revenue. The trend works well for domestic and offshore firms.

2009 AFP Annual Conference Review: B2B Payments Poised for a Comeback

Wed, 14 Oct 2009 16:11:20 +0000

Entry by Aaron McPherson

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The 2009 AFP Annual Conference was held in San Francisco this year from October 4-7, and was a more subdued affair than last year, as you might expect given the state of the economy. There were fewer attendees (4,000, according to AFP), and fewer major announcements. In fact, the major topic of discussion, as far as payments was concerned, was business-to-business (B2B) electronic payments, one of those opportunities that, like micropayments and mobile payments, seems like it should be huge but never seems to quite get off the ground.

The well-known advantage of checks over any alternative is the inclusion of the remittance advice with the mailed check, facilitating reconciliation with the invoice.

There are two main approaches being followed to bring this capability to the electronic world. The most direct one is to simply attach remittance data to electronic payment instructions, already supported by the ACH system, and coming to Fedwire and CHIPS next year. The ACH version has not had much adoption so far, and one banker from a top 5 institution was worried about investing in the Fed initiative with what he considered inadequate support from the industry. Further complicating matters is resistance from Europe, where the new wire systems cannot support the amount of remittance data called for by the proposed standard.

The second approach is to send the remittance data through a separate network, as is done by JPMorgan Chase's Order-to-Pay (previously Xign), American Express' S2S, BNY Mellon's SourceNet, US Bank/Visa's Syncada/PowerTrack and Bank of America/Bottomline Technologies' PayMode. I am more optimistic about this strategy, although it has not so far had a noticeable effect on either ACH or check volumes. Bank of America's decision to hand over PayMode to Bottomline was at least partially driven by a failure to meet growth targets, and from what I have heard, SourceNet and Order-to-Pay have also had difficulty meeting their objectives. Perhaps ownership by a single financial institution discourages other institutions and their customers from participating; this may have been part of the thinking at Bank of America.

Besides the remittance data issue, another explanation for the resilience of checks is that they are deeply embedded in corporate accounts payable processes, and the only way to loosen their grip is to get the corporates to change their A/P systems. SunGard thinks they have the answer with their new EcoSystem Communication Service, another third-party network that connects corporates directly with one another and takes advantage of SunGard's large market footprint. I interpreted this announcement as the corporates making good on their threat at last year's Sibos that if the banks didn't come up with a solution, they would. While banks would be allowed to offer their services over the EcoSystem, it would be on a competitive basis, which is exactly what banks worried would happen with SWIFT's SCORE initiative. Interestingly, SWIFT has named SunGard a "preferred partner", even though their initiative would seem to compete directly with SWIFT's own plans to connect corporates to each other. This suggests to me that SWIFT has begun to see corporate access as an insurance policy against any attempts by banks to bypass SWIFT through direct connections; if all the corporates are using the EcoSystem or SWIFT to connect to each other, the banks will have to use it as well. This is a very bold and ambitious move by SunGard, and I would vote for it as the most significant announcement of the show. However, it will be tough to pull off; SunGard is going up against a whole range of established competitors, in what has historically been a difficult market. Perhaps EcoSystem, as a bank-independent, corporate-focused entity, will have greater traction than past efforts.

Keywords

B2B payments, AFP, financial supply chain management, corporate payments

Sustainability Services for Financial firms: What's important.

Wed, 14 Oct 2009 14:38:25 +0000

Entry by Sean O'Dowd

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Please watch or download for those of you who do not have access to YouTube the following perspective on sustainability services for financial services firms.

File

sustainability.WMV (11.2MB)

Video

Flash Content requires JavaScript to be enabled and the Flash player to be installed.

Corporate Treasurer's Survey - Answers to Webcast Questions

Mon, 21 Sep 2009 17:17:19 +0000

Entry by Jeanne Capachin

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For those of you who just can't get enough of our North American corporate treasurer's survey, here are some of the questions from our Webcast that we didn’t get to answer live. And, let me just say, "Wow!".

We had 330 in attendance for the webcast, and we were inundated with questions from you all about a wide range of topics, following are some of the questions we couldn't get to on the call. Others we'll have to hold off on until we get our next survey results and more insights from treasurers about their relationships with their financial institutions. That said, here are some more of your questions with our responses. And we'd like to hear what you think, are any other perspectives that we might have missed or that you can elaborate on? In our survey, we heard a lot from treasurers, are there other points of view that you can share? Let us know here or give me or Scott a call.

Q: When you say cost of borrowing is low, is it because of generally low benchmark rates? There could have been an increase in credit spreads they pay over a benchmark.

A: The question we asked was referring only to the costs experienced by the corporates. Many banks are indeed profiting from more favorable credit spreads, but we did not capture specific information on that topic.

Q: How do these treasurers monitor their counterparty risk?

A: This is a question we asked in the research, and what we found was that they used credit ratings, financial statements, news reports, looked for pricing fluctuations, and fund prospectus - in that order of importance. Credit ratings, financial statements, and news reports were both used by a majority of respondents.

Q: It appears that the mid market and large have a large percentage that say they are not interested in SWIFT? Given the technology investment interest, how do you account for that?

A: Although interest has increased, it is still a minority of firms that are moving forward with SWIFT for Corporates. One important thing to consider is that the decision to invest in SWIFT connectivity is usually made as part of a larger treasury technology project. What we expect is that SWIFT will become a common addition to treasury technology projects going forward.

Q: Is the rebalancing of non-credit relationships to gain access to credit the rationale for the increased use of bank deposits and sweeps we are seeing in the market?

A: That may be part of the answer, as well as simply parking balances for now in investment vehicles that may have low returns, but are considered safe.

Keywords

corporate treasury,

SWIFT for Corporates - the financial crisis was the catalyzing event (2 Comments)

Fri, 26 Jun 2009 14:15:24 +0000

Entry by Jeanne Capachin

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I just published a report analyzing some of the results from our first joint survey with Treasury Strategies. More reports to come, but we got this one out first as the findings are quite different from what we have heard in the past. SWIFT for corporates is gaining momentum in North America, with 1/2 of the firms responding (230 firms, all primarily doing business in North America) either interested, evaluating, or already using SWIFT for corporates.

What we found is that the financial crisis was the catalyst, but there was also readiness to adopt:

SWIFT has been effectively marketing their capabilities to corporates,
Alliance Lite removes the big "SWIFT is too expensive" barrier,
Service bureaus & software providers have mature offerings that can meet the needs of the vast majority of firms where SWIFT makes sense, and
It's no longer bleeding edge.

The financial crisis has been (and continues to be) a watershed event for bankers and their clients. Acceleration of demand for open standards and bank-agnostic connectivity is one of the unintended consequences that I think will lead to more transformation in the types of offerings that are available for large corporates and MNCs.

Looking ahead, SWIFT is working closely with SCORE participants to develop new offers for corporates and to solve some of the nagging problems that a fragmented group of financial institutions cannot. On the table are things such as bank account administration and federated identity management. These issues have been addressed before by groups such as Identrus, but with SWIFT in the mix now corporates have a more coordinated voice and a champion with experience with developing and promulgating standards throught the financial services community.

What does this mean for financial institutions I think we'll see a subtle power shift to large corporate clients. We're seeing that already as tier 1 banks are moving away from blocking standardization efforts and the leading banks are working with their clients to increase adoption and develop new solutions. We will likely also see less usage of bank payments initiation and cash management applications with the biggest clients, as they move to more straight-through processing via their ERPs, treasury management systems, and communication gateways. Bank cash management applications are more appropriate for mid-market and those large corporates that are using fewer financial institutions, and that market will be better served in the future as bank product management teams can focus more on their needs - rather than those largest clients that can be better served by more automated channels.

But maybe I'm wrong about the future - we thought SOX would be a big catalyst for change, we thought the Internet would transform corporate banking and open up new digital marketplaces. Doesn't this seem different now? Banks must adapt to new, smaller revenue streams and cannot be all things to all people (& serve them well). SWIFT has a powerful position and the next big addressable market for them is corporates. Enhancing offerings and acting as a broker between corporates and their banks will shift the balance of power more in favor of corporates. But there is inertia. I just don't think intertia will win this time. So what do you think? Am I making too much of these findings?

Keywords

SWIFT, cash management, treasury strategies