Interview with Philippe Foulquier, Director of the Financial Analysis and Accounting (FAA) Research Centre, Director of the Executive MBA Paris and Academic Director of MSc Financial Management in European Apprenticeship Track at EDHEC Business School
Interview with Philippe Foulquier, Director of the Financial Analysis and Accounting (FAA) Research Centre, Director of the Executive MBA Paris and Academic Director of MSc Financial Management in European Apprenticeship Track at EDHEC Business School.
For over 10 years now, the FAA research centre has focused on performance measurement and company valuation in different sectors. Its expertise in the domain of insurance is recognized particularly in Europe. Solvency II prudential regulations have completely revolutionized the way a company is managed as well as performance measurement. The Professor shares his thoughts on the FAA Research Centre’s activities and the role of its research in training EDHEC students.
1. You have the multiple responsibilities of being a Professor, heading up a research centre as well as two programmes. How are these three functions complementary?
These functions are actually very complementary, because they feed off one another. In recent years, I have taught financial analysis and corporate finance in the MSc in Nice, London, Singapore, Lille and Paris, as well as Executive MBA classes in many companies. For 10 years now, 100% of my classes benefit from the research work carried out by the centre (performance measurement, company valuation, company management, IFRS treatment of goodwill, leases, financial assets, fair value). Alongside these financial analysis courses, there were many specific courses (electives) on topics covered by the centre (management of insurance companies under Solvency II constraints , value creation, the impact of IFRS on company management, the valuation of digital businesses and the venture capitalist approach).
Similarly, the business challenges that I can identify during my courses (interaction with apprentices and EMBA candidates on issues within their companies) or during corporate training sessions, feed our work and are always the source of our new research themes.
2. What are the preferred research subjects and the industries/areas that the FAA research centre’s work focuses on?
We conduct our research work on i) the impact of Solvency II insurance company management, currently focusing on real estate on one hand (at the request of a government ministry) and on the other hand, mutual insurance companies whose DNA is creating a new dimension in performance measurement; ii) performance measurement through accounting standards; and iii) performance measurement through the modelling of default (bankruptcy) risk.
Furthermore, we are currently working on state-of-the-art performance measurement in all sectors. The aim is to extend the approach used by the financial sector (under prudential constraints) to all the sectors, by introducing the notion of risk measurement. Lastly, a study is also underway on the issue of performance measurement and the valuation of digital businesses and start-ups.
3. How are your research results applied by your contacts in the private or institutional space?
On the back of our research, conferences and corporate training, some companies have developed their benchmarks for measuring and managing the performance of their company (evolving from measurement based on the single-dimension of "margins" to the three dimensions of “margins, return on equity and risk”), and this is done across all sectors.
Some have gone even further by implementing holistic management models based on these three dimensions, but also by integrating an approach that optimises capital allocation by activity and that takes into account the establishment of risk appetite (Enterprise Risk Management). On the institutional side, our research has also helped develop the asset-liability management of many insurance companies and asset management companies. For over 10 years now, we have been regularly sought out by the European Commission, EIOPA, professional associations and numerous European companies. Our research fosters EDHEC’s "Make an impact" motto.
4. Among the strong positions that derive from your results, you assert that the Solvency II European directive on prudential rules is too burdensome for the insurance sector, consequently impacting real estate investment. In a few words, can you explain the concrete implications of Solvency II on insurance, on the one hand, and on real estate, on the other hand ?
Solvency II is a profound change because it proposes a holistic approach to risks, which requires an intrinsic cost of capital for every incurred risk. Unlike Solvency I, market risks are now explicitly taken into account. For example, for real estate, the regulatory capital charge is equal to 25% of the amount invested. This charge is highly controversial and often regarded as one of the major obstacles to boosting the share of real estate within insurers’ portfolios. Our research involved studying the role of real estate in asset-liability management, the relevance of this 25% calibration and its correlation with the financial assets defined by the European prudential regulator. In the past, our studies have also focused on private equity, the equity Dampener, bonds and reinsurance.
Real estate has historically played a vital role in the asset-liability management of insurers, given its long duration, its ability to hedge inflation risk, its contribution to portfolio diversification and its performance. Its role in asset allocation must now be assessed based on the four elements of duration, liquidity, risk and profitability, in line with the Solvency II regulatory capital requirement. Some already prefer to opt for structured products, covered bonds, mortgage -backed securities, commercial loans, agricultural loans, collateralised loan obligations, public or private loans and alternative investments (private equity, LBOs, infrastructure funds, hedge funds, etc.). As for its 25% calibration, this percentage was defined by the regulator based on the volatility of the London market, which does not fully reflect the composition European insurer’s real estate portfolios. We therefore tested the volatility of different European real estate markets and their correlation with financial assets. This work leads to new proposals that will be the subject of a forthcoming study.
 Arias L., P. Foulquier, T. Maury, “The impact of Solvency II Prudential Regulation on Property Financing in the Insurance Industry”, EDHEC Position Paper, February 2017.
Arias L., G. Déderen, P. Foulquier, T. Maury, “What solutions does the insurance sector have in the face of Europe’s low interest rate environment”, EDHEC Position Paper, November 2016
 Verriest, A. and B. Dierynck, "Financial reporting quality and peer group composition" and Verriest, A. and E. Leung, "The Geography of Evidence from Segment Disclosures", 2 articles being submitted to FT-ranked international academic journals.
Bouwen J., A Verriest, “The informativeness of EBITDA for Users of Financial Statements”, Research Workshop in EDHEC to PhD Students, 23 March 2017, London.
 Du Jardin, P. and E. Séverin, “Dynamics of firm Financial Evolution and Bankruptcy Prediction”, Expert Systems with Applications, vol 75, p25-43, March 2017
Du Jardin P., D. Veganzones, E. Séverin, “Forecasting Corporate Bankruptcy using Accrual-Based Models”, Computational Economics, Article accepted, forthcoming.
 Foulquier, P., Translation: "Business model and valuation of companies in the digital economy", General Assembly of the Regional Digital Hub in Roubaix, (2,131 participants), Video-conference talk delivered from San Francisco alongside Gabriel Sidhom, CTO Orange Silicon Valley, 20 June 2017, San Francisco
 Arias L., P. Foulquier, “How calibrate Risk Appetite, Tolerance and Limits: The issues at stake for capital allocation, ERM, and business performance”, Position Paper, EDHEC, January 2016
Foulquier P. “Solvency II: an internal opportunity to manage the performance of insurance companies”, EDHEC Publications, October 2009
 See footnote 1 on real estate, footnote 4 on risk appetite; we can also cite the following articles:
Arias, L and P. Foulquier, Tr: "Risk Management: the new Face of Insurance", Finance Innovation Centre, 2015
Arias L., M.H. Arouri and P. Foulquier, "The impact of Solvency II on bond management", Bankers, Investors, Markets, Special Issue March-April, 2014.
Arouri, M.H., P. Foulquier and A. Le Maistre, “A proposal for an interest rate Dampener for Solvency II to manage pro-cyclical effects and improve asset-liability management”, EDHEC Publication, with the support of Russell Investments, June 2014, 72 pages.
Foulquier P., Tr: "Chapter 16 - Measuring private equity performance and in a Solvency II environment." Tout Savoir sur le Capital Investissement – Capital Risque, Capital Développement, LBO », Gualino Lextension editions, Avril 2014