This should hopefully start to reverse unnecessary time spent on certain tasks and increase the time available to partner with the wider business around managing emerging risks and opportunities.
The survey reveals, for instance, that 74% of respondents feel their tax and finance departments spend an inappropriate amount of time on data collection, cleansing and validation, with 70% spending inappropriate time on tax compliance.
Critically, however, any steps toward transformation may be impeded by the need to reduce cost. Indeed, 87% of survey respondents plan to reduce the budget of their organization’s tax and finance function over the next 24 months, by an average of 5.3%.
This is despite an expected rise in the workload across tax and finance functions, including an anticipated 74% increase in governance and reporting on global tax policy and controversy to key stakeholders, as well as the significant cost of complying with emerging digital tax filing requirements over the next five years.
It is a situation made more challenging by many organizations’ inability to accurately measure the cost of their tax department. This is often calculated solely by the headcount of the tax team. However, consider the shadow tax functions mentioned above – while not part of the tax team, they carry out tax processes and therefore should be counted as a tax cost.
The road to transformation
While insurers appear to readily recognize the need to transform, there are key obstacles to making their ambitions a reality. These obstacles also vary significantly from one organization to the next.
When asked, “What is the biggest barrier to delivering your tax and finance function’s purpose and vision?,” 41% of survey respondents cited an inability to identify, evaluate and respond to legislative and regulatory change. Meanwhile, 39% named a lack of a sustainable plan for data and technology, and 19% the inability to hire and retain required talent.
While data and technology will provide the backbone for a large proportion of insurance activity – from automation of processes to reporting to tax authorities – the complexity of the regulatory landscape is exceptionally challenging right now.
As mentioned earlier, the industry is going through the implementation of IFRS 17 – the newest standard for insurance contracts. This is going to essentially reframe the way that accounting results are presented and how accounting outcomes are calculated, so it is the most significant accounting standard change in many years.
Alongside this is the introduction of BEPS 2.0, which will have a major impact, especially on multinational insurers.
Considering all of the challenges facing insurers, it is perhaps unsurprising that as part of transformation, 85% say they are more likely than not to co-source select tax and finance activities over the next 24 months.
But the sourcing model that best suits one organization may not be right for the next. As such, insurers may want to consider the following five points:
1. Build an effective operating model
This starts with identifying exactly what the current model is and what future model a business wants to get to, and how to bridge the gap between the two. This will involve mapping each activity that ought to be undertaken by the tax function and which activities could be delivered alternatively – be it through automation or outsourcing/co-sourcing.
According to the TFO survey, as well as using in-house shared service centers, 56% of insurers are changing their tax and finance operating models through “co-sourcing with a provider with significant capabilities in data, technology and shared service center delivery,” while 33% are “driving increased automation within the internal function” among other solutions.
2. Build technology into the operating model
Revenue and other regulatory authorities globally are investing in data analytics capabilities, which reinforces the need to build technology into the operating model. Insurers must decide whether they build this technology in-house, partner under a managed services model or adopt a hybrid approach.
While a “build” solution might seem more proprietary, it will carry significant risk of obsolescence and ongoing maintenance. While 81% of respondents plan to invest an average of US$3.5 million in tax technology over the coming three years, this could be viewed as a relatively small amount and might suggest a tactical technological approach to discrete projects.
It is worth noting that while technology will be an important component in any tax operating model in the insurance industry, it will rarely be a solution on its own.
3. Establish a standardized way of working
A key element of an optimized operating model for the tax and finance function will be establishing, as far as possible, a standardized way of working across local entities. Most insurers have a decentralized approach because they want each of the local business units to be run with enough autonomy, but this can result in different risk outcomes. Standardizing and streamlining the way of working, together with eliminating redundant processes, is critical.
4. Adopt an operating model on a common platform
Similarly, insurers with decentralized tax and finance functions might need to adopt an operating model that prescribes minimum standards and expectations delivered on a common platform. This will be critical in terms of meeting the needs of the group tax function.
5. Develop a clear business case
To achieve a reimagined tax and finance operating model, insurers will need to develop a clear business case assessment highlighting the value of that function partnering with the business. This will contain a transformation and automation roadmap, and an implementation plan including clarity around the roles and responsibilities of the retained function where there is an outsource component.
Insurers continue to face pressures from customers, shareholders, regulators and tax authorities. This is set against the need for a robust technology framework to handle increasing volumes of data and the continued introduction of complex regulation.
The harsh reality is that transformation is a necessity, not an option. Tax and finance functions not only have an opportunity to reimagine their operating models but also have a major role to play in delivering organization-wide change.
The challenge for insurance tax and finance functions is to do this in a way that ensures they add real value when partnering with the business, are well positioned to leverage data, and are able to drive reduced risk and increased efficiency across their business processes.
A special thank you to David Bearman, EY EMEIA Tax Insurance Leader and Scott Guasta, EY Americas Tax Insurance Leader for their contributions to this article.