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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.