As the crisis strains resources and processes, insurers should think past tactical responses to mitigate risk for the future.
In their initial responses to COVID-19, insurers have rightly focused on customer and stakeholder needs. Maintaining solvency, ensuring operational resilience and engaging regulators and governments on a healthy restart of the global economy have been other priorities.
Much uncertainty remains about how the impacts on insurance companies will play out. It’s clear, however, that the impact on key back-office operations – including finance, risk management and actuarial – will be significant. It’s just as clear that effective financial reporting processes and operations, combined with strong risk discipline and a robust control environment, are critical to helping insurers navigate out of the crisis. Indeed, if ever there was a time for finance, risk and actuarial leaders to step up, the time is now.
COVID-19 is stressing the finance functions in several ways, which are highlighted in this article. It also includes recommended actions finance leaders can take now (the immediate term), next (the coming months) and beyond (for the longer term) to mitigate the disruptions and get their teams working at peak capacity.
The stresses of remote working and the likelihood of longer financial closes
The challenges associated with remote working and increased demand on skilled resources would be difficult under any circumstances. But they are exacerbated by pressures from several highly demanding reporting initiatives that were underway before the crisis hit. They include programs designed to meet new regulatory requirements (such as IFRS 17) and transformation programs designed to boost productivity, accuracy and speed in financial reporting.
There is understandable pressure to focus all resources on pandemic-related initiatives, including triage and near-term response plans. However, the disruptions caused by COVID-19 only highlight the need to continue with – and even accelerate – the critical change programs across the business. The success of these initiatives will secure the future as the industry emerges from the aftermath of the crisis.
The move to widespread remote working is testing operational continuity and the resilience of critical processes across the business. The financial close is no exception.
The identification of critical resources, technology and vendors is an important first step. Significant capacity issues, knowledge gaps and disrupted access to critical systems and data are to be expected. Availability of third-party data from distribution partners and outsourced providers could be heavily reduced or even delayed. These factors will lengthen production cycles and shorten time for management review, meaning close activities may need to be reviewed and re-sequenced.
Deviation from usual processes will require an updated risk and control framework. Reinforced controls and specific monitoring of critical journal entries will be top-of-mind. Similarly, extra attention should be paid to cash processes due to heightened fraud risk and an unsettled control environment.
The bottom line for finance leaders: there are multiple barriers to navigate in conducting an efficient and effective close process.
Increasing reporting and analytical pressure on finance and actuarial teams
Market volatility and widespread uncertainty present an opportunity for skilled and experienced finance teams to make a big contribution to the business. However, meeting the increased demand for analysis, modeling and reports is more difficult under disrupted working conditions.
Solvency, premium adequacy tests, insurance contract liabilities and the most sensitive assets (e.g., goodwill, assets under IAS 39, DAC) and tax matters merit further requirements definition and deeper analysis. The risk is that business interruption, market volatility and significant claims activity result in incomplete information from operational activity. As a result, finance and actuarial teams will have to exercise extensive professional judgment around asset and liability valuations. The net effect is more pressure on core teams and increased strain on control and review environments.
Reserve reviews will become more complex as coverage and key assumptions are in flux or reconsidered. More frequent and more detailed off-cycle reporting to boards, regulators, investors and other stakeholders is inevitable.
As the economic impact of COVID-19 plays out, finance and actuarial teams will be asked to deliver more reporting and analysis. Given the uncertainty and shifting conditions, they will also be asked to provide additional judgments and assumptions. Finance and actuarial expertise and leadership have never been more valuable to insurers than during this time of intense pressure.
Pressure to advance critical programs, such as IFRS 9 and 17
Despite the recent delay in the IFRS 17 implementation deadline, time remains short for insurers to complete the necessary work. There is little doubt that current market conditions will stress design principles, but current programs should continue. Finance leaders should look for opportunities to accelerate progress; for instance, resource scarcity may lead some processes to be automated, re-engineered or eliminated.
Some insurers have not yet focused on defining metrics and engaging the business. These steps will become doubly important as existing metrics are re-appraised and earnings guidance is withdrawn or amended as a result of COVID-19.
There are also significant opportunities to accelerate finance transformation. Energizing cultural change and updating working models can create real value, while streamlined processes and reduced books of work can be tested for longer-term operations.
Prioritizing actions and seizing opportunities: insurers must evolve with today’s changing demands
Tactical responses have naturally taken precedence in the immediate aftermath of the pandemic – and much work remains to help ensure finance teams can continue to function effectively in the coming months. But finance, risk and actuarial leaders who can look further into the future and plan now for more efficient and effective reporting processes and operations will realize considerable value for their firms – at a time when these contributions are most needed. The key is to de-risk critical pathways while optimizing operations.