Increasing the value of the company is commonly done through increasing profitability but also through decreasing the capital required to support the business. QED has developed a toolbox of methods available for improving profits and decreasing the cost of capital. With multiple options available, we would look to which provide the greatest increase in value to select which should be implemented given limited resources. It is important that the value add can be tracked over time based on the organisation structure.
Excess Profits over Capital Cost is the most common metric for measuring short-term economic success.
QED’s toolbox contains all initiatives that will drive the profit.
QED’s Capital toolbox will help reduce the capital requirement without losing out on profits.
Tracking of profit targets for effective Performance management based on lines of business and distribution channels.
Profitability of a short term insurer is driven by five key areas. For each of these QED has identified several tools available to improve performance.
Example of profitability tools:
The liquidity analysis gives conclusive guidance around the levels of cash a company needs to hold in order to fulfil future obligations even in stressed conditions and still frees up cash for investments./
The first step in this analysis is to ensure that all cash flows entering or leaving the organisation are captured on a level that allows the projection forward for the next 12 months. Available assets are tiered based on liquidity and the risk appetite for liquidity is expressed through stress tests that are applied to both cash flow projections and liquid assets. This will allow QED to determine the liquidity buffer that the company needs to hold in order to satisfy all obligations even under stressed conditions. The cash exceeding the liquidity buffer can be invested to generate additional return.
QED can support the implementation through providing the necessary models, designing stress tests and facilitation of discussions with management. We can train staff to use the models as well and ensure regular assessment and reporting is done.
An insurer may have expenses which are high, driving poor underwriting results.
Multiple analyses are available here, to understand the key drivers of expenses better. An example is the functional cost type expense analysis. This analysis seeks to divide expenses into the key functions of claims management, new business, administration, investments and other. The results of this analysis will indicate which function is the driver of the high expenses, enabling action to be taken to reduce expenses for this function.
Next best product
Existing policyholders offer significant potential for additional product sales. It is likely that existing policyholders have a need for a product the insurer is offering. Data science techniques can be used to determine the next product your policyholders need.
QED can use data science techniques to cluster policyholders into groups that exhibit similar behaviors and then determine the next best product suited to these policyholders. Supervised techniques can be used to determine
To understand the cost of capital insurers need a clear view of their capital requirements, which will also be informed by the risk appetite of the company and the capital available to the company, through for example group structures or investors willingness to inject additional capital. The tools required to reduce the capital required, and to understand the capital availability are set out below.
Example of capital tools:
Asset liability management
The asset-liability management process seeks to understand how liabilities are exposed to market risk factors and informs the investment strategy to avoid unnecessary risk taking.
QED is specialised in assessing the market exposure like interest rates, inflation and foreign exchange rates in technical provisions and other liabilities. We can provide the analysis and corresponding metrics to predict changes of the liabilities In changing market conditions and how to best inform the investment strategy to address those changes through the choice of adequate investment portfolios. We can also support the implementation of an alm process through training, Models and reporting templates.
Risk appetite framework and target capital
The risk appetite determines the amount of capital the company needs to hold is an important aspect of managing the balance sheet.
QED will review the current risk appetite framework in place or support the company to develop a risk appetite for the organisation that is in line with the expectations and the decisions of the board. We are also able to help to allocate the capital requirements to the key management areas be it lines of business, distribution channels or geographical areas in order to determine the necessary profit that each area is contributing. In order to implement the risk appetite framework in an organisation QED can support to embed risk appetite into the capital management process or connect the topd-own Risk appetite to more operational risk indicators used on a day to day basis.
Geo-spatial analysis of exposure to manage catastrophe risk
Understanding the physical location of risks is key to minimising exposure to geographic concentration risk which in turn decreases concentration risk.
QED can geocode addresses to determine the latitude and longitude of these risks and provide insight into which areas are over exposed and which are under exposed. This can allow insurers to manage risk in certain areas by increasing premiums or limiting sales. Insurers can also use this information to focus sales efforts on untapped markets.