Insurance modernization: How do we get there?

The many factors impacting the insurance operating model are interdependent and have overlapping impacts and implications. Any changes to the existing operational model requires a holistic approach; implementing change via one-off, tactical, and reactive projects suboptimal not a viable way to prepare the organization for the future. The impacts of each change driver (e.g., the ORSA or new insurance contracts accounting standards) will significantly affect actuarial, finance, and risk management, as well as IT, compliance, and other functional areas. The breadth of these impacts require key functional areas to work together to create a new insurance operating model that is responsive to internal and external stakeholder needs and demands, and enables effective management of organizational-wide change.

Because most insurers are beginning their insurance modernization journey, there is no “one-size fits all” approach. However, what is critical from the outset is that all modernization initiatives share the same end-state vision. Effective modernization strategy requires holistic consideration of data, processes, technology, and people, as well as the business and operational changes required to define and meet new performance metrics. And, while this journey will not be an easy one for many companies, the ones that fall by the wayside will be at a significant competitive disadvantage – and sooner than they may realize.

Financial reporting

Drivers of change

  • Regulation and reporting
  • Information and analysis
  • Operational transformation

Typical insurance modernization initiatives

  • Target operating model assessments
  • Finance function effectiveness reviews
  • Accounting conversions
  • Solvency modernization
  • Model governance and model risk reviews
  • Technology, IT and data
  • Hedging strategies
  • Reinsurance solutions
  • Capital management
  • People and change

Actuarial

Current state

  • Financial and regulatory reporting is time consuming, labor-intensive and error-prone.
  • The company addresses new reporting and regulatory requirements by adding on to existing processes (which are often spreadsheet based), rather than integrating them into the overall reporting framework.
  • Finance "owns" the numbers.
  • Financial processes are characterized by a dependency on multiple manual reconciliations.
  • Actuaries and actuarial departments use badly dated technology and/or default to tools that are familiar but not entirely fit for purpose.
  • The control environment is characterized by back-ended detection controls.

Future state

  • The company manages complex financial and regulatory reporting in an efficient and cost effective manner, and presents information in a clear manner.
  • New reporting requirements are integrated into overall finance, actuarial and risk management work flows.
  • Actuarial "owns" several key balances.
  • There are consistent assumptions for GAAP, PBR, and risk reporting.
  • The finance, actuarial, risk management, and operations use consistent data, assumptions, systems and processes to produce metrics.
  • Automated feeds and processes reduce time, fewer manual feeds and reduce dependencies on specific personnel; overall, this reduces error and improves process efficiency.
  • The control environment is characterized by front-ended preventative controls – increasing confidence in results at Board and C-suite level.

Data

Current state

  • The IT environment is characterized by multiple platforms, legacy systems, and calculation engines.
  • Actuarial often believes IT does not understand its needs and lacks the flexibility to perform all desired analyses. In turn, IT often believes actuarial lacks discipline and control.
  • Data is poorly managed across multiple repositories.
  • Multiple sources of the truth – no standardized data directory.
  • Significant amount of resource spent generating data and addressing and data needs.
  • Expensive to maintain and manage.

Future state

  • Actuarial production systems are supported by and integrated with the IT functions platforms, and there is enhanced enterprise architecture for data systems and tools.
  • New reporting requirements are integrated into overall finance, actuarial and risk management work flows.
  • Data warehouses and integrated systems support improved analyses, and improved automation and enhanced tools facilitate a "single source of the truth".
  • Employees are able to focus on value-added analysis that informs stakeholders of pertinent developments in a timely manner.
  • A manageable number of modern calculation engines.
  • More timely and relevant information is available for strategic and operational planning and decision making.

Investors

Current state

  • Investors find it hard to understand the "value drivers" in the business CEOs complain that their companies are undervalued. New reporting requirements will create a new reporting language.

Future state

  • Investors understand the business better because they can clearly see the drivers of short- and long-term profitability.

Capital

Current state

  • Capital is expensive and used inefficiently.

Future state

  • Access to cheaper sources of capital.
  • Capital decisions reflect impact on all relevant metrics.