Tag Archives: finance

10 Building Blocks for Risk Leaders (Part 1)

Important things in life are not easily reduced to 10 easy steps. Nevertheless, this series provides a list of 10 building blocks to achieving long-term success in risk management from someone who has spent more than 25 years striving to carve out the most satisfying career possible, while never losing sight of the attributes attached to the bigger picture.

1. Many Good Places to Start

Over the years, many people have asked me how they can break into risk management. They see the potential from a distance and have a sense that risk management just might be a better career. Oftentimes, these folks are working within the insurance industry: in claims, loss control, underwriting or brokerage. Interestingly, many in the insurance industry believe that transferring their skills to risk management for a company in a particular industry would be difficult at best. And there has been a parallel mindset within some industries that risk managers should have a background in their particular industry to be successful.

The belief that any risk leader, especially a risk manager, must come from within the industry has been most common in the manufacturing and healthcare sectors. Proponents of this belief argue that their industry is just too special to have a mid-to-senior-level manager come from another industry, that they should not have to train such a manager or even that their industry could not be learned by those coming from other industries. Needless to say, I disagree vehemently with this position. Happily, in the last five years, a few progressive leaders in certain industries, such as healthcare, are beginning to revise their strategies toward actually requiring the new eyes, ears and perspectives that come from a diversity of experiences.

There are many good places to start a career in the field of risk management. Risk leaders come from all stripes, with a large variety of different starting points. Ultimately, they succeed or fail for reasons that go far beyond where they got their start.

2. Educational Strategy

Conversations with my team members about their development have frequently revolved around understanding precisely what educational credentials were necessary to “get the boss’s job.” There are as many answers to this question as there are aspirants to risk leadership positions. I know of no two colleagues whose preparatory or continuing educational profiles are exactly the same—and that’s a good thing . Nevertheless, the question of what educational strategy should be followed to achieve leadership roles in risk management is a valid one.

The first challenge in answering this question is the fact that the risk management function may be part of different departments in different organizations. While reporting patterns have shifted over the years, the risk management function sits most often in the finance area, whether in public, private or nonprofit companies or even governmental and educational entities. The next most common reporting structure has typically been the legal department. From there, the risk management function can and does end up reporting just about anywhere—often because the firm’s management does not understand enough about it to know where it rightly belongs. In some cases, placement of the risk management function is (wrongly, in my opinion) tied to the organization’s risk profile. For example, a real estate company with a large property exposure may place risk management in the property acquisition department. Risk management practitioners may land in any number of odd places as a result.

Where the risk management function is placed in the organizational structure naturally influences the educational requirements imposed in the hiring process, as well as the expectations of hiring managers. For example, if risk management sits in the finance department, there may be subtle to obvious pressures for that applicant to have a similar educational background to the rest of the finance team. This would include a business undergraduate degree and finance-focused master of business administration (MBA), as well as continuing education that might include becoming a certified public accountant (CPA), chartered financial analyst (CFA), etc.

It is generally desirable for risk management employees to continue to report to the finance department over time, especially if they aspire to move out of risk management and into the treasurer, controller or chief financial officer positions. Risk management personnel who find themselves situated in the legal department may find their future opportunities limited and sometimes stifled completely. (Those lawyers can be quite a clubby group.)

Unfortunately, it’s highly unlikely risk management employees will be able to predict who’ll they’ll be reporting to next year, let alone five years from now. So, this factor should not drive educational strategies. On the one hand, risk is so heavily influenced by and intertwined with financial aspects of enterprises that having a financial educational background will usually prove helpful to the employee’s—and the department’s—future effectiveness. And, while a general counsel who has risk management reporting to her may prefer a lawyer for all areas of responsibility, the smarter ones will know that a broader skill set—including financial savvy—will be helpful to the department as a whole.

On the other hand, an argument can be made for going the legal education route. A significant part of a risk manager’s responsibility is tied to civil legal matters. People often confuse experienced risk management practitioners with lawyers, as they’ve had to learn so much about the law to succeed. And certain risk management roles, especially in the claims management area, are so involved with legal tasks that legal education is highly valued.

So, what is the best long-term educational strategy? Consider what group of skills and knowledge make risk managers successful. In my experience, those skills include various levels of acumen in finance, law, audit, compliance and operations. This is not to say that education in other specialties would not be helpful, because some risk exposure emanates from every part of an organization. A broad business management education tends to be the most useful for long-term success. And don’t neglect continuing education as a lifelong pursuit. Acquiring specialist designations deepens the knowledge base needed to excel, and these are always worth pursuing .

Modernization: Finance Faces New Pressure

Demands by the board, senior management and business units for more strategic and forward-looking information, together with competitive and regulatory pressures, have intensified the need to modernize insurance company operations, including the finance function, in particular.

A modernized finance function that provides internal and external stakeholders insightful and actionable information is critical to an insurer’s ability to respond to evolving regulatory and reporting requirements and enjoy a competitive advantage in the marketplace.

The case for change

Insurers are reducing costs while managing increasing external and internal requirements for analysis and reporting. To meet these challenges, a common modernization goal – and the core of finance modernization – is the establishment of effective data management and an integrated communication and automation platform. Factors influencing the need to modernize include:

  • Margin compression – A soft market and an increase in the severity of catastrophes are affecting insurers’ top and bottom lines. As a result, finance and other functions have to reduce expenses while providing effective service. In addition, insurers must address aging infrastructure and build scalable automation solutions that integrate finance, actuarial and risk to facilitate access to data and create an efficient platform for the future.
  • Increasing external reporting requirements – Multiple accounting bases have led to a need for additional technical competencies. Regulatory requirements, in particular, have put an added strain on financial organizations; the Insurance Contracts Project, Solvency II, ORSA PBR and real and potential SIFI designations are necessitating expanded access to data and more sophisticated reporting by insurers. These changes may require new measurement models and disclosures, general ledger re-mapping, presentations of financial results and, finally, conversion plans.
  • Increasing internal reporting and analytic requirements – Enhanced modeling capabilities have resulted in a need for more robust valuation and asset testing but also have created the potential for product innovation and an overall competitive advantage. At the same time, the demand for better analytics and accelerated reporting is pressuring finance organizations to produce and analyze data at a more granular level in an accelerated timeframe.

In addition to these challenges, life insurance finance teams are contending with complex insurance/investment product offerings with hedging and capital management strategies, vendor extracts and unit value calculations for separate account accounting and reporting. The teams also must deal with insurance asset and liability modeling to calculate reserve valuations and proper asset and capital management, and complex life external treaties and affiliate reinsurance for capital management purposes.

Finance functions that continue to operate in a silo, separate from other related functions and the business, and use disaggregated, manual processes will be unable to be an effective strategic partner for the business. Insurance organizations must revisit their finance service delivery model to better align structure by type of activity and customer and address process, data and technology platform issues to meet growing demands.

Characteristics of a modernized company

A modernized company has efficient processes and clearly defined stakeholder (risk, actuarial, finance and technology (RAFT)) expectations. More specifically, a modernized finance function has the following characteristics:

  • Data – Data strategy is consistently defined and “conditioned” to be processed from administrative systems to the ledger and ultimately the reporting environment. There is clear ownership of data. In a modernized company, data flows from commonly recognized sources and is capable of being extracted for analysis with minimal manual intervention.
  • Organizational structure – Insurance finance organizations are structured by activity type and customer (transaction processing, specialized services, decision support). Activities are centralized where possible, leveraging shared services, centers of excellence and outsourcing, and decentralized where necessary. More specifically, companies that are able to effectively respond to industry pressures and outperform their peers demonstrate: 1) that finance operations are analyzed objectively as a service provider in terms of scope, cost and performance from their customers’ perspective; 2) that, as a strategic business partner, finance’s operating model is integrated with related areas (actuarial, risk, investments, reinsurance) and aligns with the business model; and 3) that the finance organization focuses on continuous improvement and seeks out an appropriate sourcing model.
  • Tools and technology – Modernized tools and technology help the finance department process transactions in a more integrated environment with automated controls. Integrated platforms enable more flexible reporting that helps finance respond to finance customer and ad-hoc data needs. The general ledger is thin; robust sub-ledgers feature streamlined (hub) accounting rules; and there is a data warehouse structure to store detailed data in commonly recognized sources. Consolidation and business intelligence tools help facilitate streamlined internal reporting.
  • Processes – Better data management and integrated automation allow for automated reconciliations and elimination of unnecessary activities. Planning and forecast activities are on a rolling basis with select assumptions. A nimble data environment enables finance to meet changing internal and external reporting requirements. Process owners are accountable for continuous process improvement. Greater than 60% of activity is focused on useful analysis.
  • Reporting and governance – Better communication with finance’s customers helps the function better manage expectations. Clarified roles and responsibilities and automation allow for more scalable efficient operations. Integrated committees within the RAFT functions and the business provide oversight and facilitate timely decision-making. Controls are well defined, rationalized and automated where possible.
  • Business intelligence – Modernized finance functions streamline reporting of financial and operational metrics and align it with the company’s strategic objectives. Demand management minimizes unnecessary reporting activities. Business units receive standard reports and provide business user access to data.

The benefits

Finance serves many roles within an organization but essentially strives to balance compliance, efficiency and business insight. A modernized finance function can deliver on all three fronts rather than only one or two of them.

Insurers traditionally have deferred investing time and money to resolve legacy back-office issues. Instead, they have invested in front-office operations and cut spending in other areas. However, as a result of increasing functional interdependencies, modernizing the finance function is now an imperative. Finance must not only ensure compliance with changing reporting requirements but also increase organizational efficiencies and provide valuable analytical insights that help the business quickly make informed decisions to gain a competitive advantage.

Factors for successful modernization/ key considerations

Possibly overhauling entire systems, processes and functional areas may feel daunting to company executives. In most cases, modernization will take several years. Accordingly, it is vitally important to develop a modernization strategy that articulates a path to real change. This will include visualizing a compelling future, clearly communicating expectations, creating a road map with achievable goals and avoiding overreach during implementation – in fact, regardless of the extent of required change, we recommend a staged approach to modernization.

Some high-level recommendations:

  • Assess how well your people, process and technology can meet growing demands.
  • Create a vision with design criteria/guideposts, a compelling future state and a gap assessment to the future state.
  • Create a road map that outlines a staged approach with defined initiatives and clear accountability. This will help you develop a more detailed business case and clearly define implementation plans. Initial steps should address deep dives into bigger issues and potential quick wins.
  • Look beyond finance to consider various internal stakeholder perspectives, including actuarial, risk, investment, reinsurance and business leaders, as well as external constituents such as regulators, rating agencies and investors.
  • Consider changing organizational models first. Change agents in key decision-making roles should expedite analysis, decisions and change.
  • Early wins create momentum and set the stage for behavioral change. Management must set the proper tone to ensure there is no “opt out” potential from the finance team.

Future Is Bright for P&C Agents

The experts guaranteed that the Baylor and Alabama football teams would win their bowl games after the 2013 season. Both lost. Baylor was favored by a whopping 17 points over Central Florida but lost by 10, while Alabama was favored by 15 over Oklahoma but got crunched by 14. 

Likewise, for decades, the “experts” have been betting against independent insurance agents, yet agents keep winning. Why? The consultants, finance guys and others who populate the skyscrapers on Wall Street discount the power of the local trusted insurance agent who does business on Main Street.

That’s not to say that the recent report from McKinsey on the future of property/casualty insurance agents should be discounted. It raises some very good points about how insurance agents need to evolve to continue to be the distribution channel of choice in the insurance industry.

McKinsey got some things right, some wrong. Let’s start with the latter.

What McKinsey got wrong

— The agent’s role hasn’t changed.

Automation has reduced independent agents' role in underwriting and processing, so insurance companies perceive agents are doing less and should get less commission. But the agent’s role has not changed. The client still needs a local, trusted adviser to explain and recommend the proper insurance coverage. Today, that role is valued even more, with trust in big corporations and the government at all-time lows. Cost-cutting is the easy way to increase short-term profits, and the biggest cost for most insurers is commissions. The McKinsey report gives a short-sighted insurance company executive a reason to lower commissions, but companies that reduce commissions will be following a “fool’s gold” strategy producing short-term gains at the expense of the long-term viability of their agent-based distribution.

— Brand awareness doesn’t translate into customer loyalty.

A talking gecko, the discount double-check, Flo, Mayhem or Farmers University don’t build customer loyalty. They do build customer awareness, so the big insurance companies spend hundreds of millions of dollars on ad campaigns. But being top of mind doesn’t mean the customer will have any loyalty to the company. You can’t create a relationship with a person through advertising. People create relationships–for example, with someone whose son or daughter plays on the same soccer team and attends the same school as the agent's children. The opportunity to establish a relationship is unique to the agency distribution channel. It takes time and effort, but once established the relationship creates strong customer loyalty. That’s why you never see any studies from big consulting firms that ask people whom they trust more – their local agent or the insurance company We all know the answer.

— Independent agents will gain market share as auto insurance becomes commoditized.

I agree with McKinsey that some parts of the auto insurance market are becoming commoditized but disagree with the conclusion that this will hurt independent agents. Because they can offer multiple carriers, independents will still get the sale. They will just place the business with the best-priced carrier. The big losers will be the captive distribution companies, which will be unable to offer their clients choice.

–A multi-channel distribution strategy ends up cannibalizing agent-based distribution. McKinsey argues that insurance companies must balance their investments among multiple distribution platforms. It sounds reasonable, but in reality it means a company must reduce the amount of money it commits to its agency distribution channel to reallocate its resources to contact centers, web portals, advertising and other costs of building a direct consumer platform. Companies that follow this strategy will discover that they traded valuable multi-line customers for single-product consumers with no company loyalty.

Where McKinsey got it right

— Agents must evolve in the way they attract and retain their customers.

Absolutely! The cost of technology is dropping so fast that small and mid-sized agencies can now use tools like social media and data analytics that only large companies could afford a few years ago. Local agents need to be able to engage with their customers in real time. That requires they have a digital media and mobile-compatible platform as well as a social media capability to engage with clients and prospects.

— Agents must be seen as able to handle all of a client’s insurance needs. Product peddlers won’t survive. Agents have to be able to demonstrate the value they add by virtue of their expertise and that their advice can be trusted.

— Agents must understand the customers they are targeting and stay focused on that segment. One size no longer fits all in today’s insurance market. Independent agents need to understand their target market, the attributes of profitable customers, and how to reach and serve them. Just like the big insurance companies use advertising to create a top-of-mind brand, agents today must become top of mind with their customer segment.

Today, we live in a world that is moving so fast and becoming so much more complicated that people need someone they can trust—and work with conveniently when and where they want. Current trends in the insurance marketplace bode well for the local, trusted, independent adviser who represents the interests of her clients. The McKinsey report supports that conclusion.