Podcast transcript: How COVID-19 is impacting insurance finance teams and insurance CFOs

13min approx | 9 October 2020

Yolaine Kermarrec

Hello everyone and welcome to EY’s Insurance CFO survey podcast. My name is Yolaine Kermarrec and I’m a CFO consulting partner based in London, working with many insurers in Europe on finance transformation.

In today’s episode, we will discuss how the COVID-19 has impacted insurance finance teams and how CFOs are responding to the pandemic with Martina Neary, our National Markets Consulting Leader for Financial Services.

Hello Martina and welcome!

Martina Neary

Thanks Yolaine, I’m happy to join you today and to comment on the result of our insurance CFO survey. In July 2020 we surveyed 15 CFOs from insurers operating in the UK, and there are some interesting insights.

Yolaine Kermarrec

Indeed. Let’s start with CFOs’ priorities. We are living in unprecedented times and the COVID-19 pandemic has clearly been hugely disruptive to many sectors, including insurance.

We’re seeing the acceleration of transformation projects for finance teams and CFOs, who had to deal with an overnight shift to full-time, remote working.

How has the COVID-19 pandemic changed the key priorities for insurance CFOs?

Martina Neary

Thanks Yolaine.

For most of the CFOs we spoke to, business growth is the top priority over the next 12 months. And this is not only about business recovery, this is also about enabling growth.

One CFO mentioned pivoting to a different sales channel mix as a result of the lockdown.  Another highlighted that current market conditions were making growth attractive in certain product lines and that capital was being allocated to these areas of growth potential.

There are growth opportunities available for insurers who can adapt at speed and scale to increase market share and a fit for purpose finance function can be an important competitive advantage.

The COVID-19 crisis has brought a greater focus to the emerging trend of finance functions becoming better partners to the business, providing better insights and supporting investment decisions. 

Yolaine Kermarrec

We’re also seeing an increased importance on financial planning and analysis, known as FP&A, capabilities given the uncertainty and the complexity of the current environment.  Business planning has always been an important tool to equip the Board with critical information to steer the business. It has never been as important as it is today.  11 CFOs out of 15 ranked business planning in their 3 top priorities for the next 12 months.

The pandemic has meant that CFOs need to make the planning process more agile, to ensure a fast response to the COVID-19 pandemic.  To provide actionable insights to the Board and regulators, CFOs have focused on scenario analysis and have adopted a simpler, more proportional approach to focus on the ‘so what’ question. They have also increased collaboration across finance, risk and the business to speed up the process and some have been leveraging existing data visualisation capabilities to help make sense of the numbers.

More strategically, we’re also seeing an acceleration of technology-led FP&A transformation projects including lite modelling, driver-based analytics and goal setting capability to support decisions, better data integration between actuals and forecasts, and a move to continuous planning.

Martina Neary

Yes, that’s right.  The biggest blocker to transformation that CFOs have called out is the lack of change execution capability. Even before the pandemic, the day job and the number of financial closes during the year can sometime leave little room for efficient change execution. Now CFOs have the added challenge of trying to conduct change virtually, while dealing with fast evolving, competing priorities. It’s not easy.

Legacy technology is also slowing the pace of transformation and hindering business as usual activities - finance technology has been under-invested in the past and it’s often overly complex and fragmented where different systems have been brought together. We’re also seeing some vendors stopping support of on-premise solutions, which is forcing insurers to adopt cloud solutions. Technology enablement is critical for finance teams to make processes more efficient and to deliver higher-value projects. 

Yolaine Kermarrec

Despite all the disruptions to business because of the pandemic, we haven’t seen significant delays to the Q2 reporting timetable for 2020 and a third of the CFOs we spoke to, prepared half-year reporting quicker than last year. Most put this down to efficiency initiatives like automation, workflow management and process improvements.

For the third that, on the contrary, indicated delays to their Q2 reporting timetable as compared to the 2019 interim, what were the causes for the delay?

Martina Neary

Some mentioned the operational complexities of a remote close process.

But for most, the delays were down to the consideration of complex asset and liability valuation in light of the current uncertainty, with a lot of new information emerging during the pandemic, and to increased disclosures requirements, especially regarding going concern considerations, conduct-related matters and key judgements and assumptions.

Yolaine Kermarrec

Yes, the COVID-19 pandemic is impacting a number of accounting judgements.  

Two third of the CFOs updated their reserving judgements for half year reporting.  This is especially the case for lines of businesses directly affected by the pandemic, such as income protection, travel, business interruption and life protection.

We could see changes in actuarial estimates, projections and methodology and models, and in underwriting strategies because of this. There is further complexity in quantifying the secondary effects of the pandemic on a wide range of non-lifelines, and determining how these impact both earned and unearned provisions.

We are also seeing a big impact on judgements on property investments. There are questions over the extent to which the decline in UK property prices over the last few months is representative of current valuations given the sharp decrease in transactions.  Getting

data to perform valuations is a challenge, with some property indices not currently being published due to lack of volume of data. 

Martina Neary

Insurers are also having to review their claims assumptions.

A number have seen an immediate ramp-up in claims in areas like travel, business disruption and life protection due to the increased number of deaths. We expect a surge of claims in 2021 in other areas.  Health insurers have seen business as usual claims almost stop during the pandemic and we’d expect these to come back again in 2021. There is also a possibility that a reduction in testing for things like cancer may see a surge in claims for life insurers in the following years.

Regardless of their speciality, all insurers are likely to be impacted in terms of premium income and any reductions in interest rates. 

Yolaine Kermarrec

So, we would expect to see changes to claims assumptions in half-year reporting then?

Martina Neary

At the time of the survey, a third of insurers we spoke to didn’t plan to make claims assumption changes for half year.

It’s a very complex exercise, but as the impacts of the pandemic become clearer, and insurers go through their annual review cycle, we would expect changes for year-end reporting. Life insurers will need to consider whether there is an impact on longer-term assumptions around mortality, morbidity and lapse rates. We are starting to see some data coming through with a bit of a lag, but it’s not clear yet what the impact will be on future short- and long-term mortality trends. We’re also not seeing data yet around the impact of government interventions like the furlough scheme on lapse rates on group pensions. This will change as the financial impact starts to crystallise.

And all of this means changing risk profiles for insurers.

Yolaine Kermarrec

Yes that’s right Martina, we’re seeing an increased emphasis on capital position from most insurers and most are taking new measures to keep their solvency within the target zone.

Almost 65% of insurers that we spoke to have updated their Solvency Capital Requirement in Q1 or Q2 2020 as a result of the COVID-19 pandemic. A full recalculation of the Solvency Capital Requirement other than at year-end is usually only triggered by a significant change in the risk profile of the insurer – which is an indication of the impact that the COVID-19 crisis has had on the industry.

Almost 90% of the CFOs we spoke to, are monitoring the solvency position more frequently, with over half reporting to the regulator on a weekly basis.

So what measures are insurers taking to keep solvency within the target zone?

Martina Neary

We’re seeing a number of measures, like the acceleration of cost reduction programmes, issuing new capital, updating hedging and reinsurance programmes, and updating their investment strategy or suspending dividend distributions. There has definitely been increased pressure from the public for firms to do the right thing for employees and policyholders and not just shareholders – which has meant some firms have suspended dividend payments to be seen as ’doing the right thing‘. 

Yolaine Kermarrec

Cost reduction has become an increasingly important focus for CFOs during the pandemic – all but one of the insurers we spoke to plan to reduce their enterprise-wide cost base over the next 12 months, with 60% targeting a reduction of 5-10%.

Travel expenses have obviously sharply decreased, but natural attrition has dried up and headcount reduction has mostly stopped since March, as some companies committed to not making redundancies this year. So, some CFOs are reporting a higher than expected headcount at this stage in their longer-term cost reduction plans.

The COVID-19 pandemic has speeded up the transition to a modern workplace in the short-term and we expect to see some changes to the real estate footprint in the medium-term, as insurers consider the longer-term plans for more flexible working. 

Martina Neary

That’s right, and back to our earlier point on technology, to drive cost out of the business in a sustainable way, CFOs will have to invest in technology and data analytics to remove manual processes and also to adopt a holistic approach to improve end-to-end processes across the organisation, avoiding silo projects.

It is also very interesting to see an increasing trend over the past few years of CFOs playing a central role in enterprise-wide transformation programmes such as cost optimisation.   CFOs provide the governance around prioritising funding and control gating. They monitor programme costs and track financial and non-financial benefits. 

What impact has the pandemic had on controls Yolaine?

Yolaine Kermarrec

We saw an almost overnight shift to full remote working when lockdown hit during March. The key priority for CFOs then was to ensure business continuity and to close their half year reporting remotely.

60% of insurers we spoke to have strengthened their controls, which is a lower number than expected. This demonstrates CFOs’ confidence in the resilience of their finance function.

The changes we have seen to controls include adding COVID-19 financial control to Board meeting agendas; including regular management information and key performance indicator reporting on controls; additional scrutiny over and documentation of judgements; additional oversight of outsourced service providers; re-design of internal audit procedures to test the effectiveness of remote controls; design and test operational risk assessment components; and an increased frequency of certain controls.

Almost two-thirds of the insurers we talked to are planning to automate 5 to 20% of their controls in the next 12 months – they’re planning to automate workflow and internal controls, reconciliation controls via process automation, analytics and process-mining.

All of which will have an impact on the future of working for insurance finance teams as well as return to the office.

Martina Neary

Yes, CFOs are planning a slow, phased return to the office, with only 35% expecting that over half of their finance team will be back in the office by the end of 2020. Lockdown really was an overnight shift to remote working, and we’ve seen an evolution of optimisation of time. Employees have been juggling work expectations with caring responsibilities and home schooling and organisations have refreshed working practice policies as a result.

We’re also seeing a trend for the humanisation of leadership, with conversations on mindfulness and wellbeing becoming the norm.

More progressive finance functions are now evaluating remote working and challenging the boundaries associated with work as both a place and an activity. They’re considering how best to enhance performance through increased flexibility around location, scheduling, responsibility, hours and contractual arrangements.

Yolaine Kermarrec

Thanks for your time Martina. This has provided some real insight into how insurers are navigating these unprecedented times and redefining how finance teams will operate in the future. And thank you everyone for listening.