6 !{ArticleDetails-ReadTime} 19 Jun 2018
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How to converge finance, risk and actuarial functions

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EY Americas

Multidisciplinary professional services organization

6 !{ArticleDetails-ReadTime} 19 Jun 2018

Insurers must be certain that finance, risk management and actuarial functions share common data.

C-suite executives and senior leaders in finance, risk and actuarial are under intense pressure to navigate a wide range of megatrends and market forces, ranging from increased regulatory requirements and low interest rates to globalization and the disruption caused by new market entrants.

Because traditional transformation programs are not sufficient for these new business realities, insurers must fully converge finance, risk and actuarial operations — essential business functions that traditionally have worked in silos. It is imperative that finance, risk and actuarial come to share a common set of core data, underlying infrastructure and shared assumptions. Otherwise, leaders of these functions will struggle to meet the needs of internal stakeholders and external regulators, and to improve performance in meaningful ways.

Beyond the near-term challenges, integrated transformation efforts also set the foundation for next-generation operational models, data-driven decision-making and other capabilities necessary to conquer the daunting competitive challenges the industry faces. A few insurance leaders have shown the way forward, by driving fundamental and permanent changes at the operational level and adopting convergence.

The results included significant capital freed up for strategic redeployment, increased organizational agility and optimized cost structures. These insurers are better positioned to address ever-evolving market and business challenges.

The trends and drivers that demand transformation

For many insurers, the impetus for transformation is a combination of powerful and interrelated forces, including:

  • Turbulent macroeconomic conditions marked by persistently low interest rates
  • Significant regulatory change — International Financial Reporting Standards, Solvency II, Own Risk and Solvency Assessment and systematically important financial institution designations, to name a few
  • Disruptive change represented by innovation, new technology (such as FinTech), nontraditional competitors and new market entrants (such as robo-advisors)
  • An increasingly globalized marketplace
  • Low margins and ongoing cost pressures
  • Increased restructuring and M&A activity
  • Intensifying competition for scarce talent — especially for specialized actuarial resources and senior finance and risk executives

Typically, each of these forces is addressed by a stand-alone change program or initiatives undertaken by finance, risk or actuarial individually. Each group tries to solve the problem on its own, rather than taking a holistic view of the issues or coordinating strategies and investments to solve the problems.

Rising demand for integrating finance, risk and actuarial functions

These forces have also led to extraordinarily high demand for the services provided by finance, risk and actuarial functions, especially in the analytical realm. There is intensifying demand for specific and consistent data from both external and internal stakeholders.

  • Regulators require new data, which insurers often struggle to provide accurately or efficiently. Plus, regulators are increasingly attuned to inconsistencies in data provided by the same company’s risk and finance teams.
  • Business leaders are looking for insights regarding capital optimization for restructuring or rationalizing legal entities, as well as relevant and timely performance data and forward-looking information to make the most of M&A and other opportunities. And they want it faster because they must make decisions more quickly to keep up with the accelerated pace of change.

The rising demand is a long-term trend that shows no signs of abating and continues to strain the organization. It is no surprise that it has served as a final tipping point or catalyst for change. But transformation must focus on full convergence. Unless finance, risk and actuarial operate from a common set of core data, underlying infrastructure and shared assumptions, functional leaders will continue to struggle to satisfy regulatory reporting requirements and internal demands for more and better information.

Moving forward: five steps to converging finance, risk and actuarial functions

  1. Find common ground
    First and foremost, leadership of finance, risk and actuarial must work to better understand each other’s perspectives. Serving as better advisors to the business, as EY research has shown these leaders want to do, necessitates deeper and broader understanding across functional lines. The common goal of bottom-line business success is one clear guiding principle. Once a baseline level of trust and shared purpose is established, conversations can — and should — naturally turn toward operational matters with a common goal. Specifically, that means defining common views of policies, processes, data and technology. The closing and reporting process is a great place to start, perhaps in a cross-functional workshop environment, with clearly achievable benefits and incentives for each group.

  2. Align transformation programs
    The significant number of transformation programs already under way within the finance, risk and actuarial functions represents another opportunity to coordinate. This may involve pooling investments for data integration or new technology implementations. Collaborating on governance models and policies or standardized controls can also be a valuable exercise. However, the big strategic idea is simply that transformation programs must encompass finance, risk and actuarial collectively, rather than be conducted alone by individual functions.

  3. Eliminate redundancies and automate processes
    The center of excellence model, which has certainly proven its worth within these individual functions, must similarly expand to reach across organizational walls. In the future, shared services operations or centers of excellence for end-to-end and cross-functional processes may become important elements of the operating models of industry leaders. The models used by finance, risk and actuarial will be built with consistent data and common underlying assumptions for calculating loss ratios, reserves and the like. Yes, some parallel processing will remain, and each group will apply its unique experience, but redundancies and risky rework will be eliminated to seize the compelling cost savings, efficiency gains and accuracy improvements that are there for the taking. In general, processes will be more automated and flexible, as well as smarter and faster.

  4. Clearly define responsibilities
    This is not to say that accountants will be expected to act as actuaries, or vice versa. Rather, each group will do what it does best and maintain oversight of specific areas in which it is most qualified. But all of these groups will work from the same core data and consistent baseline assumptions, enabling everyone to work from a single version of the truth.

  5. Obtain sponsorship and advocacy from senior leaders
    Any change of this magnitude requires organizational work, as resistance to change (not to mention political issues) is a common barrier to success. To a large extent, convergence is about teaching each of these groups to speak each other’s language and understand each other’s points of view. Until that happens, individual functions may continue to insist that they have unique data needs and resist process integration. For all of these reasons, highly visible sponsorship and advocacy from senior leadership are necessary to define the big-picture vision, build momentum once convergence programs start and remove organizational obstacles along the way.

Moving forward: five steps to converging finance, risk and actuarial functions

  1. Find common ground
    First and foremost, leadership of finance, risk and actuarial must work to better understand each other’s perspectives. Serving as better advisors to the business, as EY research has shown these leaders want to do, necessitates deeper and broader understanding across functional lines. The common goal of bottom-line business success is one clear guiding principle. Once a baseline level of trust and shared purpose is established, conversations can — and should — naturally turn toward operational matters with a common goal. Specifically, that means defining common views of policies, processes, data and technology. The closing and reporting process is a great place to start, perhaps in a cross-functional workshop environment, with clearly achievable benefits and incentives for each group.

  2. Align transformation programs
    The significant number of transformation programs already under way within the finance, risk and actuarial functions represents another opportunity to coordinate. This may involve pooling investments for data integration or new technology implementations. Collaborating on governance models and policies or standardized controls can also be a valuable exercise. However, the big strategic idea is simply that transformation programs must encompass finance, risk and actuarial collectively, rather than be conducted alone by individual functions.

  3. Eliminate redundancies and automate processes
    The center of excellence model, which has certainly proven its worth within these individual functions, must similarly expand to reach across organizational walls. In the future, shared services operations or centers of excellence for end-to-end and cross-functional processes may become important elements of the operating models of industry leaders. The models used by finance, risk and actuarial will be built with consistent data and common underlying assumptions for calculating loss ratios, reserves and the like. Yes, some parallel processing will remain, and each group will apply its unique experience, but redundancies and risky rework will be eliminated to seize the compelling cost savings, efficiency gains and accuracy improvements that are there for the taking. In general, processes will be more automated and flexible, as well as smarter and faster.

  4. Clearly define responsibilities
    This is not to say that accountants will be expected to act as actuaries, or vice versa. Rather, each group will do what it does best and maintain oversight of specific areas in which it is most qualified. But all of these groups will work from the same core data and consistent baseline assumptions, enabling everyone to work from a single version of the truth.

  5. Obtain sponsorship and advocacy from senior leaders
    Any change of this magnitude requires organizational work, as resistance to change (not to mention political issues) is a common barrier to success. To a large extent, convergence is about teaching each of these groups to speak each other’s language and understand each other’s points of view. Until that happens, individual functions may continue to insist that they have unique data needs and resist process integration. For all of these reasons, highly visible sponsorship and advocacy from senior leadership are necessary to define the big-picture vision, build momentum once convergence programs start and remove organizational obstacles along the way.

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If insurers are to navigate the profound and rapid market shifts and regulatory head winds, they must rethink and transform their legacy operating approaches. Companies that converge their finance, risk and actuarial functions can achieve more efficient compliance with increasing regulatory demands, better insight into the business and enhanced decision support capabilities.

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EY Americas

Multidisciplinary professional services organization