Planning for the future in Insurance

Insurance planning is heavily dependent on actuarial modelling because of this complexity and uncertainty, and therefore reliant on the actuarial function. Yet the financial planning function is still predominately accounting-based. The two functions tend to operate quite independently from one another. This is perhaps one reason why financial planning in insurance lags behind other industries.

In response to ever-increasing regulations such as Solvency II and IFRS 17, some insurers have redirected their investment in the finance function from FP&A to regulatory and compliance reporting, holding back analytical development. Planning and analytics functions have been unable to exploit automation and other time-saving technologies that the current Covid crisis demands. It’s not just Covid, of course; climate change, digitisation of health and cyber risk bring new challenges to modelling insurance risk. 

Process problems create planning problems 

Insurance organisations have historically used the single annual financial planning cycle for a multitude of purposes: 

• Aligning organisational priorities
• Testing strategic investment opportunities
• Identifying and setting staffing levels and departmental budgets
• Projecting policy counts and associated loss and benefit levels
• Identifying targets against which management teams will be compensated

The planning process is lengthy, often taking six months or more from beginning to end. Continuous interactions occur at each level of the organisation as high-level goals are pushed down, interpreted, and translated into detailed, bottom-up financial plans. Plans are cross-functional with multiple interdependencies that require skilled coordination to bring them together in a meaningful manner.  

The single annual financial planning process though is deeply flawed. There are too many variables, competing objectives and interested stakeholders to be measured in a single process. Many players within the insurance industry continue to try and plan to the N^th degree of certainty for multiple scenarios which is time-consuming, resource-intensive and quickly becomes stale.   

The planning cycle is too long, too expensive and is based on assumptions that will prove to be wrong. As we’ve seen, stability is no longer the status quo. Change is rapid and continuous, be it from environmental and social factors, regulatory requirements, innovative competition and technological advancement.

Taking pandemic risk as an example – Covid-19 is the first truly global pandemic in the digital age causing organisations to rapidly update planning requirements, and most importantly, their frequency. Agility has become the new normal in planning and although insurance has done well to minimise and manage the risk, the impact on new business, interest rates, investment performance and claims has been unprecedented. In the six-month planning window alone, never mind the subsequent 12 months, the world will have changed, and the organisational course will need correcting.

Stakeholders also have their personal priorities, and in the course of maximising bonus potential their behaviour is considered sub-optimal by acting in ways that minimise revenue targets, maximise expenditure budgets, focus on unnecessary levels of short-term risk rather than long term growth and stability, or alternatively be too risk-averse leading the business to stagnate.

It has become commonplace in other industries and amongst the forward-looking insurers to utilise an annual strategic high-level five-year projection, along with a monthly or quarterly rolling/long-term reforecasting, in addition to the existing, but slimmed down, annual budget process. Agile methods including top-down and driver-based planning techniques can be adopted to streamline reforecasting.

Adapting to change

The accounting standard, IFRS 17, has been introduced with the intention of creating a single principle-based framework for all types of insurance contracts and enhancing the comparability of financial reporting between insurers around the world. Additionally, IFRS 17 is designed to increase expectations of transparency and lower granularity of reports coupled with greater analysis on the performance of the insurance contracts. What’s more, it impacts the full finance value chain - from finance & actuarial calculations and accounting, to costing, planning, forecasting and reporting. In particular, the standard requires:

• Detailed, accurate, systemised policy data;
• New calculation logic and profit recognition rules;
• Remeasurement of reinsurance contracts;
• Identification of onerous groups of contracts from the outset;
• Analysis of income, balances and cashflows at new granular levels;
• Historic, current and forward-looking data (e.g., cash flow projections); and
• Significant additional disclosures

The requirement for increased data volumes and accuracy is driving businesses to re-consider how they collect, analyse and report their data. The nature of IFRS 17 reporting is also pushing a more collaborative approach for finance, capital modelling, underwriting, pricing, reserving and risk-modelling teams in order to deliver on these requirements.

Bespoke solutions

The most suitable planning solution will ultimately depend on a number of critical factors, such as the complexity, variety and volume of insurance and reinsurance contracts, existing system landscape, IT security requirements, the number and requirements of regulatory bodies, skill sets within the organisation and of course available funds.

Running IFRS 17 reporting processes in legacy systems is likely to be a significant challenge with the requirements of additional data granularity, forward-looking analysis and cross-function collaboration. Those businesses that opt for a suitable planning platform will yield benefits and add value. It will result in satisfying the mandated reporting and compliance needs, but at the same time, will have the capability for financial modelling, scenario testing and ‘what-if’ analysis in a comprehensive framework that provides collaboration, data integration and governance.

Bolting on another system solution just to deal with IFRS 17 compliance is a short-term solution, but the top insurance organisations are using the fundamental change brought about by IFRS 17 as an opportunity to review and redesign their finance and actuarial systems and processes as a whole. Looking at long-term solutions will ultimately benefit the insurer by meeting all their needs, including planning, forecasting analysis, investor relations and regulatory obligations.

Next steps

All organisations are different – be it their scale, their variety, their culture, their people, their regulatory framework or their rate of change. As such, there is no one-size-fits-all solution that will meet the planning and reporting needs of the industry. Determining the right approach for your unique organisation is essential but is easier said than done. To get started:

1. Begin by bringing the appropriate skills from within the organisation to create a project team
2. Identify your organisation’s needs and current deficiencies from a process and software perspective
3. Determine the solutions, thinking about both long-term strategic and short-term tactical requirements
4. Rehearse these strategies among business leaders to understand the key macro factors upon which the plan is dependent
5. Outline a short, sharp planning process that makes use of infrastructure improvements to pre-populate planning scenarios, extrapolate and interpolate economic environments, and produce planning data at speed
6. Embed rapid governance process that allows quick alignment and agreement over plans, and the triggers for revisiting in given timeframes

This process will require:

• An understanding of your business;
• Knowledge of solutions on the market;
• Accounting and planning expertise;
• The ability to implement organisational change;
• A commitment to the entire end-to-end process

It is vital to ensure you have the right people available to fill in any knowledge or experience gaps. The majority of the team are likely to be existing resources; a sensible investment may have to be made in a finance transformation lead or indeed, external advisors. As mentioned previously, investing in immediate solutions will ultimately be of benefit to insurers in the long term. 

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