Finance functions and actuaries face regulatory pressure to enhance reporting, markedly improve response times and provide increasingly demanding business partners with better and more actionable information about their businesses. Advanced analytics from IT improvements will help achieve the strategic objectives.
Naturally, insurers should provide themselves with the best reporting platform they can reasonably afford. However, unlike in years past, cutting-edge reporting is just table-stakes, not a competitive advantage. Rather, competitive advantage will come from:
- An information strategy that enables transparent and compliant financial analysis and facilitates the ability to make informed business decisions.
- Information management capabilities that are foundational and support finance (broadly defined) and the business overall.
- Establishing a clear and practical vision: Identifying what will make the vision a reality will enable organizations to create a road map for change.
- Gauging the appropriate spending rate to determine how quickly the company can implement the roadmap.
Companies that do not go beyond their reliance on core reporting systems for their financial insight will be at a competitive disadvantage. There is no silver bullet for building needed capabilities, and companies will need to rethink their IT portfolio allocations and approach to spending. A steady investment will help companies build their strategic information infrastructure and effectively assess their needs on an iterative basis.
The case for change
Many insurance companies have invested in cleaning data for the purpose of reporting and analysis. Whether your company has started doing this or not, the following are important considerations to keep in mind:
- No organization has the financial resources to cleanse and array all the data and information it may ever want and make it available whenever it wants it. Efforts to boil the ocean fail.
- Companies will need to build capabilities in three areas:
– Develop focused information strategies to support actuaries, financial executives and the other people in the organization who rely on financial and reporting information.
– Frame the future-vision build and fund a flexible road map for implementation. Ensure that the road map prioritizes the most important things first and that it can change to meet new demands and realities as they arise.
– Manage data and information, including data ownership, data governance and the ability to cleanse and provide the data in such a way that it can be presented in advanced tools and manipulated by end-users, while maintaining integrity in the source-information.
Characteristics of a modernized company
- Companies currently spend a great deal of time and money on information management, but the information tends to reside in disconnected platforms, projects, data-bases and tools. Investment levels need to match the company’s vision, and there needs to be an organizational awareness that combining disparate efforts into a cohesive information strategy can partially offset high costs.
- While finance and actuarial are the primary drivers of insurance modernization because of their needs to report and book results, there is a related need for all business partners to supply, receive, analyze and explain financial and related operating data.
- Furthermore, insurance modernization will create the foundation for an enterprise-wide range of data and analytics. HR, marketing, customer, distributor and operations information and analytics all will rely on the same core capabilities, disciplines and infrastructure. A uniform approach is what will provide a real competitive advantage.
In a modernized company, a synergy of efficient, well-tuned processes with clearly defined expectations by stakeholder group exists between the risk, finance, actuarial and IT functions.
- Data – Data strategy is defined, and the organization executes its responsibilities according to this strategy. Rather than the traditional bottom-up data approach where the analysis capabilities flow from the collected data, data is strategically viewed top-down. The company identifies analytical needs and then adopts a data strategy that supports them. In a modernized company, data flows from a “single source of the truth” and can be extracted for analytical purposes with minimal manual intervention.
- Tools & technology – Tools and technology enhance the effectiveness of the finance and actuarial departments by providing them information faster, more accurately and more transparently than traditional ad hoc, end user computing analyses (usually performed in Excel). Specifically, tools that focus on data visualization can more effectively convey trends and results to management. Algorithms can be programmed to automate first-cut reserving analyses each quarter based on a rules engine (e.g., how loss development factors are selected or weighting methodologies), which can help point staff to business segments that may require deeper analysis in the quarter.
- Methods & analysis – Modernized organizations emphasize robust methods and analysis that yield superior insights over traditional methods. Examples include predictive analytics, which have transformed personal lines pricing and are currently being adopted in the commercial arena, and stochastic analysis, which adds additional statistical rigor to deterministic analysis and thereby helps actuaries transparently prepare reserve range indications that help management understand reserve risk.
- Organizational structure – Delivering superior business intelligence to management is often dependent on organizational structure and resources, and many companies are debating the merits of centralized, decentralized or hybrid organizational structures. PwC believes the organization of the future will align its capabilities as much as possible with the end-user, with IT serving as a backstop that can provide what end-users need.
- Spending – A concerted, cohesive insurance modernization program will require a change in the portfolio spending on information management. Spending will change from covering disparate efforts to strategically aligned ones.
The primary benefit of insurance modernization is better and more responsive reporting, actuarial analysis and the ability to support financial decisions. The second, and perhaps more critical benefit, is improved analytics and decision making for the rest of the organization. More specifically, insurance modernization:
- Aligns data management initiatives and governs the success of their implementation by clearly articulating both the company’s strategic mission and a measurable definition of success.
- Aligns projects and initiatives with desired outcomes by creating a road map with measurable milestones from vision to project completion.
- Facilitates prioritization of capabilities and initiatives based on overall goals and objectives, as well as realizable benefit.
- Measures the business value of initiatives and projects by linking desired outcomes (goals) and measuring progress against objectives.
- Enables measurement of program progress during rollout and informs the release planning and investment process by linking performance indicators and objectives.
The thought of potentially overhauling entire systems, processes and functional areas may understandably seem overwhelming for company executives as they set out to modernize their organizations. Modernization, indeed, is a long journey that will most likely have a high price tag. However, even if the ideal goal of modernization is holistic improvement, there is value in identifying the individual areas that most need modernization. As one area becomes more streamlined and efficient, then other areas will begin to reap the benefits.
Critical success factors
Business leaders are frequently frustrated by the fact that tactical initiatives’ results do not reflect their organizations’ mission or vision. Frequently, strategic goals are mistranslated or forgotten when it comes to defining and developing how to achieve them. In addition, efforts to improve organizational effectiveness tend to focus narrowly on the execution of existing tasks. As a result, functional improvement efforts often fail to result in meaningful benefits for the organization overall.
Strategic business architecture (SBA), which we advocate using, translates high-level business direction into tangible goals and objectives. SBA documents business-driven priorities and decisions and aligns projects and initiatives with desired outcomes. As a result, business and technology leaders can prioritize initiatives and measures their progress.
At the same time, operational business architecture (OBA) documents how functions and the overall organization realize business strategy and goals. OBA helps improve the functional core by identifying relevant stakeholders within the context of the larger architecture. OBA aligns operational stakeholders in a consistent way with the strategic and technical stakeholders that may not be involved in a given functional or process improvement initiative.
Call to action – Next steps
Insurance modernization is not about technology modernization for its own sake. It is about how technology can enable risk, actuarial and finance to share a “single source of the truth” and serve the entire enterprise with consistent, actionable information.
Strategies to realize effective organizational modernization will require a holistic consideration of all data, methods/analyses, tools/technology, processes and human-capital requirements and will need to address the business and operational changes necessary to deliver new business intelligence metrics. Any weak links between these closely connected components will limit the effective realization of a modernization effort.
If we view dimensions of insurance modernization as gears that spin together (i.e., efficiencies/ inefficiencies in one dimension(s) have repercussions for other dimensions), then improvements in any dimension will yield improvements in all dimensions and vice versa.
Although a modernization vision should be holistic to avoid “digging up the road multiple times,” it is possible to tackle modernization issues in logical, progressive ways.