1. NEXONTIS Insurance Analyzer Solutions for SOLVENCY 2 and IFRS 4
Andreas Fisch
June 13, 2012

2. Executive Summary

3. Regulatory Requirements
Solvency II
IFRS 9
IFRS 4
Insurer
Assets
Liabilites
Balance Sheet
Solvency II: Determination of needed risk capital and comparison with eligible own funds
IFRS4 : Financial evaluation of insurance policies at fair value (best estimates)
IFRS : Financial evaluation of financial assets at fair value
=> These 3 regulatory requirements need the same basic information from the complete company

4. What the auditors say
The insurance industry will have many challenges regarding financial accounting in the next years
Activity
2012
2013
2014
2015
2016
IFRS 4 Insurance Policies – Phase II
New IFRS-Standard for the accounting of Insurance policies
IFRS 9 Financial Instruments
New IFRS-Standard for the evaluation of financial instruments
Others IFRS, e.g. 10, 11, 12, …
Solvency regulations for the equity captial provisions
Solvency II
US-Tax-Reporting of foreign financial institutions
FATCA
Others, e.g. E-Tax-Reporting, FinRep / CoRep ►
Challenges for the CxO‘s
Business Challenges
CFO
Change of the financial reporting / communication
Impacts on balance sheet and P&L statement; portfolio structure
Integration in Finance Transformation initiatives
Additional alignment efforts
Moving Target – IFRS 4 standard not finally defined
Overall (CFO | CRO & Actuairs)
Re-use of existing models / calculations
Limited experiences and capacities
Project related challenges
CIO
Limited development capacities, short timeframe and massive inter-dependencies
Risk of losses in synergy by implementing special solutions
Overall (CFO | CRO | CxO’s)
Costs and Budgets – Business Plan
Lack of internal resources
Lack of qualified external consulting
Text blocks – Influencing chevrons
Challenges for the Insurance Industry

5. + No changes in the deadlines for finanical reporting
What the auditors say
Further challenges are the short deadlines for quarterly/yearly closing in parallel to increasing IFRS requirements +
Current average time consumption
Upcoming addition requirements
Increased regulatory obligation have to be realised
Additional calculation during the closing activities
Processing of additional information and auditable archiving
Bigger alignment efforts
Increased requirements to the business departments up to daily rough balance / P&L reports
Derived requirements and risks:
Discrepancy between internal and external reporting
Intrinsic risk through further Excel spreadsheets
Focus on the completion of reporting obligations instead of consulting of the business departments in financial questions
Quarterly closing – Average time until publication (days)
No changes in the deadlines for finanical reporting
Securization of existing investments for fast close processes
Challenges for the Insurance Industry

6. Current unbiased probability weighted estimates of future cash flow
What the auditors say
The new IFRS-Standard for Insurance Policies will heavy impact the current accounting of Insurers through the fair-value-approach ►
Modular concept
Main Changes
Future oriented value determination - Fair-Value approach instead of orientation in the past
Structural changes in the balance and P&L
P&L will contain future margins, deviations and estimations
Current key figures not (fully) recognisable in the P&L
Higher result deviations
Asset / Liability mismatch can only be reduced by simultaneous implementation of IFRS 4 and IFRS 9
Transition phase not finally defined (e.g. margins only on exitising policies)
Extended information in annexes (e.g. used methodes, estimation approaches, alignments, analysis of changes, risk information etc.)
Residual margin
Risk adjustment
Time value of money
Current unbiased probability weighted estimates of future cash flow
New Reporting based on Building blocks :
Best-Estimate Liability (BEL): unbiased, probability weighted average of future cash-flows, assuming that the insurer can fulfill the policy
Time value of money: capital value of cash flows
Risk Adjustment: as reserve for uncertainty regarding the amount and the moment of future cash flows
Residual Margin: which e.g. corresponds to the expected benefit for the whole duration of the policy
Challenges for the Insurance Industry

7. What the auditors say
IFRS 4 requires the evaluation of insurance policies based on discounted cash flows and will change the liabilities within the insurance balance sheet completely ►
Requirements from IFRS 4 insurance policies
Implication on financial architecture
Totally changed reporting on insurance liabilities e.g.
Assignment of policies to Portfolios (e.g. in the policy systems)
Calculation of the expected cash flow based on premium, benefits and direct costs
Discounting / Calculation of the actual value of the Cash flow
Calculation of the risik margin for uncertainties in the estmations
Calculation of the residual margin to simulate the expected benefits of the portfolio and their allocation to the periode of coverage
Creation of a new chart of accounts and new IFRS accounting rules
Ensure the tracabilitiy for a seamless financial audit
Analysis and posting of To-Be and As-Is difference and of estimate adaptations
Reduction of incongruity of Assets and Liabilities
Currently no guidelines for the transition regulations for new reporting
Most of Insurers will realise a comparative calculation – at least for internal reason (even if not requested)
For in-force policies the residual margin will also be needed
Implication: high
Consolidation
Reporting
Analytical layer
Finance
Result Data / DWH
General
Ledger
Methodenschicht
MCEV
Solv.II
IFRS
Mgmt.
...
Source Data Layer
Market data
Policies / Benefit MD
Middleware / ETL
Source systems
Policy
Benefit
Assets
...
Challenges for the Insurance Industry

8. Architectural principles
Reporting
Results
Calculation tools
Collection of the source data
Operational Systems

9. Typical insurance company system landscape using IFRA
General Ledger
Pillar 3 / Reconciliation® (based on SAP BW / BO ®) 11 12
Insurance Analyzer & Bank Analyzer solutions based on SAP IFRA
Actuarial Systems 9 10
IA&BA deal with all accounting, valuation and reporting requirements
Non-SAP or SAP based operational systems
CRM
Account Origination
Policy / Reinsurance
Collections & Disbursements for Insurance 6
Financial Asset Management
Commissions Management 1 3 5
Deposit Management
Claims Management 4
Loans Management
Contract Accounting for Banks 7 8
Business Partner 2
Operational Systems can concentrate on their core business
Example of data flow sequence FS-APPL = IFRA = Banking Services 1

10. What SAP and NEXONTIS say about regulatory requirements
„Our offer is to use Insurance Analyzer and Bank Analyzer
based on SAP Integrated Finance and Risk Architecture (IFRA)!“
150+ customers have already choosen IFRA based strategic solutions, e.g.
Standard software with quarterly, pro-active Business Content updates for new international regulatory requirements
Prooven full historization, seamless traceability and drill-down from result to source
Unified, lean, best practices data model for product based assets and liabilities
Single point of truth for product based data for reporting
Single point of truth for product based functions, shared responsibilities with custom specific risk engines and amortized cost / fair value servers possible
Fully integrated, automated back-office solution

11. Overview about IFRA based business solutions
Reconciliation Solution
Results Data Layer
Limit Management
Regulatory Reporting Analyzer (RRA)
Regulatory Reporting Interface (RRI)
Risk Management (Basel II)
Management Accounting (Profitability Analysis)
Hedge Management
Accounting for Financial Instruments (AFI)
IFRS for Insurance Solution
Solvency II Solution
Highest Volume on customer side: 70 Mio BT‘s per month
Source Data Layer (Financial Database)
Insurance Analyzer
Data Management Solution

12. Solvency II Solution

13. Solvency II Solution - Overview
The solution will:
Produce accurate data on time for Pillar 1 + 3
Ensure auditability and reproducability of data
Manage integrated finance and risk data - ensuring single point of truth for both finance and risk data
Ensure flexibility to calculate SCR modules inside NEXONTS Solvency II Solution or outside in risk engine.

14. Solvency II Solution - Overview
Operational Source and Finance systems
Import necessary data to predefined data model in source data layer.
Enrich data using derivations and calculations for Solvency II specific needs.
Calculate best estimate cash flow
Calculate Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) Optionally calculate technical provisions as a whole if a reliable financial instrument is given.
Calculate Risk Margin
Run Capital Allocation Process to deliver all results in the right granularity.
Send detailed results to Supervisory Reporting and Internal Reporting
Data Load Process Pillar 1 + Pillar 3
Data Enrichment Process
Best Estimate Cash Flow Process
Risk Engine
SCR and MCR Calculation Process
Calculate Technical Prov. as a whole
Risk Margin Calculation Process
Capital Allocation Process
Supervisory Reporting & Internal Reporting
GL / FI Solvency II Balance

15. IFRS for Insurance Solution

16. IFRS for Insurance Solution
„System shifter requirements“: Use your Risk Engine not stand alone, but together with IFRS for Insurance Solution as a complete, integrated strategic solution.
Graphic taken from IAS-Board Slides
Risk Engine Accounting
Risk Engine Accounting
Risk Engine Accounting
Risk Engine Accounting
Risk Engine Accounting

17. IFRS for Insurance Solution - Overview
SDL
Post External Business Transactions from SDL into Accounting.
Run optionally Actual Cash Flow Preparation Process and calculate extrapolations or engage a risk engine for extrapolation.
Run optionally Present Value and Risk Adjustment Process, which uses the extrapolated cash flows for calculation.
Run Post External Business Transaction, which enriches the operational postings. Run Update Secondary Business Transactions Process, which does the IFRS specific postings. Run Key Date Valuation, which does the IFRS specific valuations.
Run GL Connection and Financial Statement Item Process to send data to a FI-GL and BW.
Actual Cash Flow Prep. Process
Claims / Benefits
Premiums
Reinsurance
Coll. & Disb.
Assets
Risk Engine
Present Value / Risk Adjust. Process
RDL
Discounting and PV Calculation
Risk Adjustment Calculation
Insurance Accounting Process
Operational Postings
GAAP spec. Postings & Valuations
BW Reporting Process
GL Connector Process

18. Reconciliation Solution

19. Reconciliation Solution - Overview
Cockpit
SAP GL
Reconciliation® Solution (based on SAP BW ®)
IFRS for Insurance Solution
Solvency II Solution
Data Management Solution
(based on SAP FS-APPL 400® (IFRA) incl. PI)
Actuarial Systems
Non-SAP or SAP based systems
CRM
Account Origination
Policy Management
Reinsurance Management
Collections & Disbursem.
Financial Asset Management
Commissions Management
Deposit Management
Claims Management
Loans Management
Contract Accounting
Business Partner
SAP Pre-defined Sender/Receiver Pairs
NEXONTIS Reconciliation Sender/Receiver Pairs

20. Reconciliation Solution – Qualitative and quantitative analysis
Qualitative reconciliation examples:
„I posted in Policy Management 5 Million of premium. Do i have 5 Million of premiums also in my General Ledger?“
„Last year i payed out 30,5 Million of claims. Do i have 30,5 Million of payed claims also in my Solvency II QRT Report?“
Quantitative reconciliation examples:
I sent out 1000 records from Claims Management to Collections&Disbursements. Did i exactly receive 1000 records in my CD system?
I sent out 2000 records from Policy Management to Risk Engine. Did i exactly receive 2000 records in my Risk Engine?

21. Data Management Solution

22. Data Management Solution - Overview
FS-APPL
Financial Transaction
Business Partner
Operational Event
Business Transaction
Store data in FS-APPL
Message and Process Handling
BAPI commit transaction processing
Create/update data
Create/update
Create
Errors & Messages
Financial Transaction
Business Partner
Operational Event
Business Transaction
Check for update
Derive additional fields
Read delta data
Parallel Processing
Source System
Source System
Source System

23. Data Management Solution - Process
For SAP Systems realtime (qRFC, PI) and for non-SAP System batch (CSV- or XML-Files) is used.
Custom specific data extractors create CSV-files.
Reads the CSV-files into internal structured tables. Optionally the internal tables are stored into a DB for tracing and reconciliation.
Takes internal tables and maps it into SDL Primary Object(s).
Chunks the memory records into pieces ( ) and starts parallel processing.
Derives additional IFRS and Solvency II specific characteristics.
Updates the SDL master data if needed and creates the SDL flow data.
Errors from SDL Primary Objects BAPI Interface are handed back to the sender and stear orchestration including possible restart.
SAP System
Non-SAP System
Data Sender
Custom specific data extractor
Data Reader
Optional: DB Trace
Data Receiver
Custom specific Data Receiver
Orchestration and Error Handling
Parallel Splitter Optional: DB Trace
Data Enrichment
Data Enrichment
Data Feeder
SAP SDL Primary Objects