5 minute read 7 Oct 2021
Businesswoman using tablet in financial services

Six questions insurers should ask to evolve their tax operating model

By Andy Philbin

Associate Partner, Tax, Ernst & Young LLP

Trusted advisor. Passionate about emerging technologies. Keen skier and enjoys maintaining ageing boats in spare time.

5 minute read 7 Oct 2021

Tax practioners are seeking ways to promote resilience in an ever-changing tax landscape.

In brief

  • While often seen as a cost centre, a modernised tax function can advance critical business goals and improve overall performance.
  • Stronger data capabilities and more extensive automation enable tax teams to offer strategic insights and proactive guidance.
  • Top-performing tax teams will need new skills and talent and should be prepared to address new regulatory requirements. 

For insurance companies, support functions are typically the most common targets for cost-optimisation initiatives. That’s certainly true of tax and finance departments. At the same time, these teams do critical work – reporting accurately, staying ahead of regulations and identifying risks.

Plus, they generally operate efficiently, even if they have limited resources and use older technology. Still, tax functions are often viewed primarily as cost centres, and therefore it’s no surprise that, according to an EY research study, 79% of respondents plan to reduce the cost of their tax and finance function during the next two years.

Despite the persistent cost pressures, finance and tax teams face a great deal of change in the near term. Tax, reporting and regulatory requirements are growing more intense and complex, with greater emphasis on sharing tax data digitally and transparently. Producing more accurate information and returns more quickly is another top objective. Data volumes continue to expand, and technology gets ever more sophisticated. Transformation and technology upgrades make possible more extensive automation and deeper analysis, though tax is frequently left out or considered a lower priority, in front-office and finance transformation efforts.

Compared with organisations in other sectors, these trends may be particularly challenging for insurers, because off-the-shelf software packages are often not practical solutions, given the complex nature of tax in insurance. At some insurance carriers, business stakeholders are looking to tax teams for more precise performance insights, more detailed planning, advice regarding customer-related product taxes and tax risk management. Increasing tax transparency is also a focus for insurers and their stakeholders, with regards to the environmental, social and governance (ESG) agenda.

As a result, tax and finance leaders at insurers face key questions about where to prioritise their investments and energy. We explore a range of key questions as they seek to find a tax operating model that best suits their future goals and strategies. Many of the ideas and recommendations come from our work with both large global carriers and mid-sized regional insurers. These insights are meant to help insurance tax functions think about how to operate efficiently and effectively in satisfying external requirements, as well as to meet the strategic and tactical objectives they set for themselves.

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Chapter 1

What’s the strategic priority for our tax team?

Balancing best-in-class vs. best-in-cost

Optimising performance in tax groups starts with setting clear priorities, ensuring alignment with the broader strategic and business priorities and adding value to the organisation (i.e., not simply being a support function). Often the choice comes down to aiming for either best-in-class or best-in-cost performance.

The best-in class groups are notable for using more advanced technology and skilled specialists (whether internal or external) to deliver high-value insights for the business. The best-in-cost groups either fulfil baseline filing and reporting requirements with lean teams and whatever technology is on hand or outsource some or all of the tax activities. Best-in-class tax groups are typically more engaged with the business and conduct more advance planning, while best-in-cost groups focus on standardising core processes and controlling costs and downplaying future preparations. There is of course a continuum between these two ends of the spectrum.

The type and size of the organisation also plays a role in determining strategic priorities. Smaller and mid-sized companies have many of the same financial, regulatory and tax requirements as larger organisations, but must meet them with fewer resources. That doesn’t necessarily mean they should aim to be best-in-cost. To a large extent, the question comes down to how to determine the best investments of available tax resources, based on the organisation’s unique goals, product set and operational footprint. These considerations are not isolated to the tax function and may reflect the entire organisation.

To find the right balance, firms may focus on the basics for some parts of the business, but for others provide guidance on key policies and future tax developments. For example, relative to the Organisation for Economic Cooperation and Development (OECD) BEPS 2.0 initiative, a domestic insurer is likely to need to take significantly less action than global players. So, it’s a matter of an individual firm’s interest in getting early visibility into the collateral tax implications on UK tax rules. International groups, regardless of size, will want to be much closer to the thinking of the OECD to avoid being left behind or caught out as new requirements emerge, particularly as compliance obligations are more extensive for groups operating in multiple jurisdictions.

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Chapter 2

What will be the impact of new regulatory requirements?

Navigating BEPS 2.0, IFRS 17 and GAAP changes

There’s no doubt that financial services organisations can face considerably more regulatory scrutiny than non-regulated groups, as well as heightened private and public sensitivity about reporting in general. For insurers, BEPS 2.0, IFRS 17, IFRIC 23, UK and US corporation tax rate changes and other GAAP changes are the highest profile changes on the horizon. However, new internal controls rules and tax transparency-related reporting requirements on ESG matters could be a heavy lift for many insurers. Solvency II requirements and LACDT (loss absorbing capacity of deferred taxes) recognition will continue to place burdens on insurance tax teams.

We see no slowdown in the scope and pace of these changes, and the new demands they place on tax functions. Therefore, to manage the relentless shifts, tax teams must focus their efforts on a few areas. First and foremost, they will need robust and sustainable data sourcing and validation, with strong controls and visibility into the timeliness and accuracy of their data. Off-the-shelf software packages are not typically a viable option as they are not tailored to specific insurance tax legislation, which often leads to manual spreadsheets being used as an alternative. Again, regulators, tax authorities and other stakeholders will be asking more questions and will expect to see higher degrees of consistency in all reported data and information.

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Chapter 3

What’s the role of technology in meeting new tax objectives?

Enhancing data access and keeping up with tech transformation in the business

In terms of finding the right technology, not all tech solutions will be relevant for all insurers and finding the right toolset will be highly dependent on the tax strategy, structure and needs of the business. But, no matter the tax team’s focus, better access to quality data is beneficial. Tax functions need to keep pace with the level of technology and digitalisation being introduced across the wider business, especially if the organisation is investing in transformational change over and above simply enhancing current technological processes. Aligned to the deployment of new technologies, some organisations are looking to strengthen their governance and management of tax data by appointing tax data officers and setting up a supporting tax data office.

The impact is felt on data used by tax functions for both direct and indirect taxes, including corporation tax, VAT and Insurance Premium Tax (IPT). Better technology can also help senior executives demonstrate compliance with requirements such as the Senior Accounting Officer regime.

More importantly, when tax has access to such data, they can deliver information and insights at a pace that keeps up with the business, as well as satisfy regulatory requests more efficiently. Data is largely how tax can keep up with increasingly agile business operations.

There is also a compounding benefit: even as it spends less time (or what the business thinks is the right amount of time) to complete key tasks, the tax team gets closer to the business and can add more value. That virtuous circle should be a target outcome for any group considering investments in new technology or updates to the tax operating model.

Tax has not typically been ‘top of the list’ for investment in automation and technology, but the need and business case are clear and compelling. Much of the value comes from standardisation of data sourcing, fluid and seamless data sharing and closer integration with stakeholders, all of which accelerates reporting timelines and helps tax teams provide more detailed analysis and insights. For all these reasons, we believe tax groups should, at minimum, be included in finance transformation programmes at an earlier stage than is usually the case. 

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Chapter 4

What’s the right level of automation?

Establishing a foundation of automation for AI and MTD

When it comes to automating processes, there’s no easy, one-size-fits-all answer. Again, much will depend on the strategy the tax group sets for itself. Companies should consider how automation and standardisation free up resources to focus on higher-value tasks (which are associated with best-in-class performance) while also reducing costs. Fundamentally, automation creates capacity, reduces human error, expands productivity and frees resources to focus on higher-value analytical tasks. These are potentially significant benefits for many different types of insurers. However, deploying technology to automate key processes has associated costs and may seem disruptive, especially if employees worry about jobs being eliminated.

Still, there’s little doubt that more automation is on the way, from the targeted automation of spreadsheets to intelligent automation of data ingestion, right through to wholesale upgrades of legacy systems. Pulls from trial balances will be automated for analysis of expense deductibility, while centralised tools will store tax payments, filing data and similar information. Specific tools and applications will help with tasks, such as compliance reporting and digital filing. In the case of IPT, calculations are increasingly embedded in underwriting processes to create integrated end-to-end processes.

More advanced tax groups often use artificial intelligence (AI) and machine learning for deeper analysis and longer-term planning. For many insurance tax groups, it’s more a question of what and how to automate, rather than whether to do so. We have seen enforced automation from the introduction of Making Tax Digital (MTD) for VAT, an effort that will expand across other taxes in the coming years. Insurers need to think about the interaction of MTD for other taxes and how automation driven by tax developments could connect with other operational parts of the business, for instance, implementing change management programmes for claims handling.

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Chapter 5

What skills do we need and what’s the right way to access them?

Seeking analytical expertise and specialty knowledge via the right sourcing models

Because tax functions are changing, they may find they need new skills and talent. Specifically, traditional, technical expertise may need to be augmented with more advanced data and technology knowledge and analytical skills.

Here again, the overall tax strategy will shape what the workforce should look like. Tax teams focused on adding value will need to ensure their members stay current on the latest tax and business issues and routinely challenge the status quo. They must understand updates to tax law, filing and other reporting requirements and proactively interpret these impacts on the business (e.g., if they present new opportunities or could have material effects on the financials). 

To some extent, tax and finance leaders face the same challenges in attracting, motivating and retaining the right staff as the broader industry does. They’ll need to articulate a sense of purpose (including ESG considerations) and shape clear career paths, with plans for professional growth and attractive compensation packages.

The talent and workforce discussion would be incomplete without mention of new sourcing options. Outsourcing is increasingly a solution for insurers seeking specialty skills, access to better technology or breakthrough performance gains for entire processes. It also helps companies stay up to date with the latest tax rules and changes. Strategic sourcing models certainly help tax leaders focus their resources on truly core activities, leaving other work to those who can do it more effectively. However, one sourcing arrangement may not be suitable for all insurers. For example, the scope of a sourcing model can depend on various factors, including the specific skillsets of the current workforce.

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Chapter 6

What are the benefits of optimising the tax operating model?

Instilling agility to increase efficiency and add more value

There is clear and compelling value associated with optimising the tax operating model. It starts with speed – both faster tax filings and accelerated reporting, and also consideration of the wider organisation’s strategic objectives. More specifically, there is less lead time between data passing from finance to tax, and back and forth with the business.

It’s worth reiterating that less time spent collecting information and crunching raw data means more time for analysing tax implications and shaping forward-looking plans. Such insights are just what most insurers need in a time of dramatic change across the market landscape, such as the increased scrutiny from a tax authority, regulatory and reporting perspective.

Effective operating models help ensure new technology supports improvements across the tax function, rather than just one element. This breadth of thinking is important in creating a compelling business case to transform your tax operating model which in turn will deliver benefits of increased speed, efficiency, decreased risk and additional capacity for higher value activities.

By reducing manual reviews and instilling more automated controls, insurers can reduce the risk of human error. Similarly, more automation and standardisation mean tax groups can be more agile in responding to changes in tax legislation or broader business and finance requirements.

What next – a tailored approach is key

Considering these six questions go some way to promoting resilience in an ever-changing and increasingly demanding tax landscape. There is no easy or standard solution; the right tax approach and operating model depend on the size of the business, its strategic priorities, the current tax operating model and resource availability.

Further, tax leaders must also assess their investments based on the level of automation and technology that suits the business. Finding the right answers isn’t easy, but the significant payoff is, in our experience, well worth the effort.

Summary

A constantly shifting digital landscape, cost pressures and regulatory changes are putting new pressure on tax functions. By optimising the operating model, tax leaders can unleash a new era of efficiency, automation and data-driven insight that adds more value to the business even as it reduces costs. 

About this article

By Andy Philbin

Associate Partner, Tax, Ernst & Young LLP

Trusted advisor. Passionate about emerging technologies. Keen skier and enjoys maintaining ageing boats in spare time.