40.3 Challenges and priorities in risk management for 2018
Low interest rate environment
The period of low interest rates also continued throughout 2017. This situation has a particularly marked effect in life insurance. Depending on the investment strategy, the persistently low interest rates can lead to a situation in which the income generated is insufficient to finance the guarantees made to policyholders. The topic of low interest rates continues to be of concern to the entire European insurance industry and is leading to intensive discussions about how insurance companies can ensure that customer options and guarantees (in both existing and new business) are financed over the long term. Significant measures taken by UNIQA within the defined life strategy have been to focus on implementing the ALM approach including stringent management rules (e.g. regarding the management of profit participation) and to provide continuous portfolio management to support the new business strategy in the personal injury insurance business.
UNIQA Insurance Platform
One of the most important key projects is the business transformation (business processes and IT systems) of all portfolio, benefit, collection/payment, commission, partner, text and printing and fund management systems for UNIQA in Austria. The existing systems have largely reached the end of their useful lives. UNIQA is therefore working on establishing the UNIQA Insurance Platform (UIP). It will gradually replace the systems set out above and consolidate these in a forward-looking and modern platform solution. The actual preparations for this began in 2016 and UNIQA has been working on implementation since early 2017. This programme involves modernisation of the most important insurance software and thereby allows the company to respond to the constantly changing competitive environment and meet customer needs and effectively manage the products in the modern insurance market. The modernisation of IT, in terms of scale, duration and complexity, is the UNIQA Group's biggest challenge in the coming years. The risks and difficulties of remaining on budget are well-known from knowledge of other system modernisations carried out in the industry.
In order to complement the efforts to establish the UIP, a Transformation Roadmap was developed in 2017 which covers renewal of additional cross and frontend systems. Implementation of regulatory requirements in the legacy systems as well as in the new systems is also ensured. Implementation of the Transformation Roadmap will support integrated end-to-end processes using modern systems which provide our customers with a state-of-the-art customer experience. They permit efficient and largely automated processing in sales and in back office operations. In addition to the UIP, substantial additional funds were invested in implementation of the Transformation Roadmap, which safeguards the technical updates to the systems and ensures a modern insurance business over the coming years.
UNIQA is currently working on implementation of a target operating model for Austria, to enable the IT modernisation project to be implemented successfully. Processes for the handling of business transactions have been influenced by mergers and takeovers since 1999, resulting in a highly complex process landscape with lots of dependencies. The project for implementation of a target operating model transforms the handling of business transactions to a two-stage logic: Level 1 cases will only be processed either automatically or by a Group service company in Nitra, Slovakia. Level 2 cases will be processed in central units under the responsibility of the Board members in charge of actuarial practice for life and/or property and casualty business. The material risk in this project involves maintaining stable business operations.
Modernisation of processes is essential if UNIQA is to remain innovative and able to respond to the wishes and needs of customers and owners. This necessarily also involves the world of digitalisation towards which we are making great strides. There is an increasing focus on issues surrounding cybercrime, phishing attacks and data theft. UNIQA has already taken precautions to cover the risk of data security.
In order to ensure that the customer experiences adjust to the new digital business models, the team for digitalisation at UNIQA (Team Digital) is using agile working methods to develop projects which use the same risk-reduction measures as other projects at UNIQA. The risks identified are monitored with preventive measures taken as required in order to minimise the probability of a risk occurring. These risks are evaluated continuously with stakeholders and the project team and if needed, escalated to higher levels.
A product is only implemented once the defined implementation criteria have been met based on structured tests.
The cooperation of the Customer Experience Team (CX team), among other things, helps to identify customer needs at an early stage. This minimises the risk of damage to reputation or of not being able to meet customer expectations. New digital solutions also undergo established IT security checks in order to identify and mitigate risks of this type at an early stage.
Right of cancellation
Something that affects the entire insurance industry is the topic of potential cancellation rights in life insurance – as a result of incorrect information that was provided regarding cancellations – which received widespread media coverage in 2017. A decision by the European Court of Justice in 2013 (Endress vs. Allianz) was followed by a decision of the Austrian Supreme Court in 2015 (7 Ob 107/15h), to the effect that the cancellation period has not yet started under European law where the information provided on cancellations was defective, and therefore the relevant party is still able to cancel the contract.
In addition to publications and expert opinions from prestigious university professors, UNIQA also holds the legal view that a cancellation is too late if made once the cancellation period has expired, even if the information provided on cancellations was defective.
Cases in which policyholders wish to rescind their contract based on their claim that the information provided regarding cancellations was defective are individually reviewed and evaluated by UNIQA.
A provision has been formed accordingly for the pending proceedings.
UNIQA is setting up a Shared Service Center (SSC) for actuarial and risk management activities, in order to be able to continue fulfilment of existing and future regulatory requirements based on the required quality levels. The SSC will relieve daily work burdens from the local companies in order to ensure more time for quality-oriented work. UNIQA is able to overcome resource shortages more effectively through the synergy effects of a central organisation unit. This step forms the basis for designing timely and high-quality supervisory reporting processes going forward.
UNIQA has also decided to extend the partial internal model to include the market risk module. A preliminary study was completed on this in May 2017. Fundamental preliminary decisions were taken on this related to the modelling assumptions and suitable software. Comprehensive test runs and further modelling phases are planned for 2018 following the intensive modelling phase in the second half of 2017. In order to meet the ambitious timetable, the topic and the associated resources required are being given high priority.
Implementation of an integrated risk-oriented internal control system (ICS) approach began in mid-2017 with a focus on all material operational risks. This approach establishes a link with topics such as data protection, security of information, IT security, emergency planning, outsourcing, etc. with due regard to the “three lines of defence”. A uniform Group-wide valuation methodology ensures that there is an adequate data basis for management information. This allows the operational risks to be managed across the entire Group and enables synergy effects to be used from risk mitigation. The risk-based approach is scheduled to be implemented in full by the end of 2018.
The EU General Data Protection Regulation (GDPR) and Austrian Data Protection Amendment Act 2018 (DSG 2018) which come into force on 25 May 2018 and require significant action on the part of UNIQA are also crucial topics. The high financial risk with significant increases in penalties of €20 million or 4 per cent of annual revenues, along with the risk to reputation in the event of incidents or a failure to ensure compliance, are being handled in a structured manner through implementation of a Data Protection Management System. Data protection is an integral part of the UNIQA organisation and is constantly developed as part of a continuous improvement process. The short implementation time frame, and in some cases, the high level of technical complexity, leads to the implementation project being assigned high priority in the project portfolio.
UNIQA is also paying greater attention to further development of future IFRSs (IFRS 17 and IFRS 9 in particular are crucial here in the long term). The major changes expected in the assessment (balance sheet as well as income statement) of the insurance business require an adequate lead time in order for the content and process-related challenges to be implemented accordingly. Further information on the IFRS standards to be applied in the future can be found in the section “Changes in major accounting policies as well as new and amended standards”.
As of today UNIQA does not see any direct risk which could represent a risk to the Group’s continued existence.