Value-based management

European Solvency II survey

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Nearly three-quarters of insurance companies have a value-based management concept or plan to implement one.

Potential increase in profitability due to value-based management (VBM) is estimated at up to 4%.

Insurers with VBM expect it to provide an average increase of 2.9% in return on economic capital. However, nearly 40% of insurers expect to achieve only a quarter of this potential benefit.

New risk capital models in Solvency II highlight the need for VBM. Most insurance companies (73%) have a VBM concept or plan to implement one. Implementation of an internal model is often a driver for VBM. Half of surveyed insurers use an internal model with risk-based management, and 25% apply the standard formula to calculate the risk capital requirement. Companies also use capital models based on Solvency I or rating models.

A range of VBM activities can be applied to increase profitability. Our survey shows that these have been adopted to varying degrees. Internal transparency increases via economic and performance measurement, transparent capital allocation and definition of VBM indicators. 27% of VBM insurers consider themselves at this level.

Profitability can also be increased by aligning executive and employee incentive structures to corporate management strategy (implemented by 9% of companies) and capital optimization through restructuring (24% of insurers). Nearly 10% of companies use VBM to manage insurance portfolios and investments, and 30% optimize their product margins and risk exposures through value-based pricing.

Increase in profitability due to value-based management (VBM)

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Increase in profitability due to value-based management (VBM) ×