Beyond Transformation: The Convergence of Finance, Risk, and Actuarial Functions
Doug French, Steven Abel and Carol-Ann Back | June 28, 2016
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), non-traditional 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.
Breaking down silos and eliminating redundancies
The large-scale transformation programs that many insurers have undertaken have mainly addressed these issues in terms of the individual functions. In some cases, redundant processes across these groups have been made more efficient, but they remain redundant.
The bigger payoffs can only come through transformation efforts that integrate processes, establish enterprise-wide standards and converge these functions, rather simply optimizing within individual functions. The key premise is that all three groups use the same foundation of data, technology, and processes for reporting.
The downside of silos
Without such convergence, finance, risk and actuarial teams may continue to work in silos, resulting in:
- Ongoing skepticism about each other’s outputs and findings
- Continuing failure to communicate and “speak each other’s language”
- Rising overhead and opportunity costs as the same models are rerun and divergent models are manually reconciled or adjusted through workarounds
- A lack of standardized data and clearly defined controls; no single or fully credible version of the truth
- Senior management uncertainty about which data or reports to trust as it confronts critical strategic and tactical decisions
- Regulatory pressure to explain different answers to the same questions
Collectively, these risks may lead to transformation investments delivering subpar returns or change programs failing outright.
Consider how the current state plays out in investment asset management. Finance is mainly interested in the reporting of financial results and the impact of assets on balance sheets; actuaries are focused on how asset value can be used to cover liabilities; and risk groups want to evaluate the pros and cons of the investments in assets. Because there is limited collaboration, each group uses its own processes and models to generate the reports and analytics it seeks. The end results may be suboptimal investments and a treatment of assets that may vary from the balance sheet to the reserve estimates.
Even the closing and reporting processes are complicated and compromised when different functions use different sets of numbers. Here again, each function focuses on its own goals—finance on conducting the close and reporting, actuaries on setting the reserves, and risk management on producing risk analytics and reporting. The fragmented and duplicative approach greatly increases the likelihood of incorrect or inconsistent results and inconsistent storylines, which in turn lead to still more rework to address variances.
These circumstances were once merely an inconvenience, but are now formidable challenges, notable for both increasing costs and higher risks.
How insurers arrived here and how to move forward
To be clear, the lack of alignment is a legacy issue, stemming equally from:
- Outdated and inflexible information technology infrastructures, which make it difficult to easily access necessary data or share common data sets
- Historical M&A activities that have not been fully integrated
- Organizational structures and competing agendas that inhibit coordination between these groups and can lead to mutual mistrust
These deeply entrenched barriers mean that insurers must undertake a broad-based transformation program that will extend beyond narrowly defined change initiatives within single functional areas. Further, they must address:
- Process and policy concerns
- Data and technology issues
- The “people factor”
Such a multidimensional and cross-functional approach offers a clear upside for the business. Significant potential benefits can result from increased efficiency, lower costs and easier compliance. In other words, the convergence of finance, risk, and actuarial operations should not be viewed as a compliance exercise, even if regulatory demands are the “final straw” forcing insurers to act; rather, it should be viewed as a performance improvement opportunity. Having better data about capital, for instance, not only streamlines regulatory responses, but also provides valuable insights back to the business.
A few forward-looking and early-adopting insurers have demonstrated the value proposition for convergence by freeing up significant capital for investment in other strategic priorities. They have also reduced costs through more accurate reporting of assets, clearer visibility into risk and performance, and better allocation of resources. The increase in data quality has led to higher decision-making confidence on the part of senior leaders and greater organizational preparedness to meet the challenges of the next five years.
First steps on the road ahead
Because every insurer has distinctive organizational models, IT infrastructure, cultures, and business objectives, there is no predetermined formula for converging finance, risk, and actuarial functions. And it won’t be an easy change, given the wide and long-standing gaps between the groups. However, there are certain proven steps that are likely to lead to transformation success, based on the experiences of early adopters.
Moving forward: five steps to converging finance, risk and actuarial functions
- 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.
- Align transformation programs. The significant number of transformation programs already underway within the finance, risk, and actuarial functions represent 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.
- 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.
- 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.
- 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.
Bottom line: convergence in a time of change
If insurers are to navigate the profound and rapid market shifts and regulatory head winds, they must rethink and transform their legacy operating approaches. And they must take a holistic and integrated approach to transformation if they are to deliver value from these significant investments.
The most powerful change they can make is the convergence of finance, risk, and actuarial functions. The end goal is a consistent, unified and controlled environment where all three functions do their essential work starting from a foundation of common enterprise data sets, technology and architecture, governance models, and processes.
The payoffs will come in the form of more efficient and cost-effective compliance with increasing regulatory demands, better insight into the business and enhanced decision-support capabilities.
- COVID-19 One Year Later: The Digital Transformation of Insurance
- Electronic Chat with Michael Kassing, CEO/CVO, insured.io
- BrokerTech Ventures Announces 2021 Cohort Class for Accelerator
- An Entirely Preventable Disaster
- Flipping the Fraud Triangle
- The January/February ITA Pro Magazine is here!
- Credit Risk, ESG, Cybersecurity Top Risk Concerns for Financial Institutions, Deloitte Finds
- Electronic Chat with Ellen Moser, Senior Client Executive, Origami Risk LLC
- The Answer to “So What?”
- Leaders Rise from a Year Like No Other!
- Electronic Chat with Jonathan Roomer, Co-Founder, YuLife
- Getting Creative to Hit COVID Curveballs Out of the Park
- Electronic Chat with Eugenio Gonzalez, Plug and Play
- New Report Projects Global Insurtech to Grow by $21 Billion During 2020-2024
- The 2020 Virtual Event Wasteland
- Insurtechs, Investors Optimistic About Post-COVID Future, New DIA/McKinsey Study Finds
- Finding Grandmas
- No Code / Low Code: The New “Shortest Route” In Insurance Delivery
- Are You Addicted to Copy-and-Paste?
- Electronic Chat with Nino Tarantino, CEO- Americas, Insurance and Mobility Solutions (IMS)
- Driving Life Insurance:Tech Alone Won’t Solve Business Problems
- Electronic Chat with Robin Roberson, Managing Director, North America, Claim Central Consolidated
- How Do You Make It Happen?
- Electronic Chat with Jason Liu, CEO, Zywave
- New Partnership Models Take Program Business to the Next Level
- New Study Finds Less than Half of Consumers Trust Insurers to Respond to Their Needs
- Electronic Chat with Andrew Mauritzen, CFO and Head of Insurance Industry, Exactuals
- You Want Us To Do WHAT For Free?
- Electronic Chat with Evgeny Aleksandrov, Co-founder and CEO, Pilotbird
- Electronic Chat with Chris Cheatham, CEO, RiskGenius
- New MIT Sloan Study Finds Few Companies Gain Big Benefits from AI
- The September/October ITA Pro magazine is here!
- “Being Right” is Just the Start of the Battle
- Electronic Chat with Amit Ranjan, Executive VP and CAO, Xceedance
- Planning for Your Business and Tech Future: Strategies, Plans and Budgets for Rapid Transformation
- Electronic Chat with Jimmy Padia, Founder and CEO, Floatbot
- Gelato with Dots and Sprinkles
- COVID-19 and the Insurtech “Junk Drawer”
- Even “Change” is Different Now. Your Strategic Planning Needs to Be Too.
- The Road Ahead for P&C Insurers: How to Understand Customers Better and Navigate the Post-COVID Insurance Market
- Electronic Chat with Jake Tamarkin, Co-founder and CEO, Everyday Life
- Strategic Planning in the “New Normal” Digital Era of Insurance – Your Next Move
- Insurer Tech Investment Priorities See Major Shift in a Post-COVID World
- Plug and Play Selects 25 Insurtech Startups for Winter Batches
- Digital Transformation – A Top Strategic Priority and New Reality
- Four Steps to Successful Migration of Insurance CCM Applications
- COVID-19 Accelerates Insurance Digitalization to Meet Customer Demand: World InsurTech Report 2020
- Electronic Chat with Greg Williams, Co-Founder, President & CEO, Acrisure
- Electronic Chat with Matt Perlman, Partner, IA Capital Group
- Insurer Digitalization: Are you a Competitor or a Laggard?
- Leaders are Leading and Creating the Future of Insurance Distribution
- 3 Things You Need to Know About No-Code
- Electronic Chat with Adam Kiefer, CEO, Talage
- Underwriting in 3D: Using Data to Adapt and Improve Life Insurance Sales
- Getting Past the "Gelato Syndrome"
- Insurers Know CX/UX is Important, but Don't Agree on Execution, Study Finds
- Electronic Chat with Steve Lekas, Branch Insurance
- How AI Can Attract Millennial Talent to the Insurance Industry
- Preventing Data Breaches
- A New Boom for Life Insurance: Shifting Away from the 250-Year-Old Policy Transaction
- Electronic Chat with Ty Harris, Founder and CEO, Openly
- A Digital Wildfire Creates a Burning Platform for Digital Insurance Business Transformation
- Digitalization, COVID-19 Spurring More IT Investment in Cybersecurity
- Electronic Chat with Michael DeGusta, CEO, ClarionDoor
- U.S. Consumers Significantly Underestimate Flood Risk, New Survey Finds
- The Future of Insurance: Opportunities in Ecosystems
- Electronic Chat with Todd Greenbaum, CEO, Input 1
- Majesco to be Acquired by Thoma Bravo
- The Evolving Role of Managing General Agencies
- Electronic Chat with Char Hu
- Electronic Chat with Allan L. Egbert, Jr.
- Electronic Chat with Christopher Tramontano and Zbigniew Gawienczuk
- Data Science is Gelato
- Insurance Innovation: Alive and Kicking
- Independent Agents Divided on Digital Experience, New Survey Finds
- Electronic Chat with Michael Jones
- Electronic Chat with Paul VanderMarck
- As Auto Insurance Premiums Shrink, Insurers Need Mobility Ecosystem, New Study Finds
- Property & Casualty Insurers Raise Digital Games as COVID-19 Elevates Customer Expectations, J.D. Power Finds
- Electronic Chat with Bobbie Shrivastav
- Meet the Board: Marissa Buckley
- Big Data and Insurtech: A Carrier Perspective
- Traditional Insurers Need Open Ecosystems, Partnerships to Remain Competitive, CapGemini Report Finds
- Electronic Chat with John C. Siegman
- 4 Ways AI is Empowering Insurers During COVID-19
- 6 Big Changes to Insurance from the COVID-19 Crisis
- Electronic Chat with Christopher Ewing
- Independent Agency Staff Morale High During COVID-19, New Survey Finds
- Electronic Chat with Brad Epker
- Tapping AI to Improve Policyholder Experience
- Electronic Chat with Manisha Bhargava
- ITA Pro Magazine, March/April 2020
- COVID-19 a Game Changer for Workers’ Comp
- Electronic Chat with Steve Comer
- COVID-19 Pandemic Forces Cancellation of ITA LIVE 2020
- Leveraging Digital Resources in the Time of COVID-19
- Electronic Chat with Robert Hartwig on COVID-19 and Insurance
- Celent Study: Most Small Businesses Still Unclear on Importance of Cyber Insurance
- The January/February 2020 ITA Pro is here!
- Deloitte: New C-Suite Roles Mean More Opportunities for Women
- Electronic Chat with Pankaj Parashar
- Electronic Chat with Tara Kelly
- Electronic Chat with Chuck Wilson
- ITA, InsNerds Collaborate to Enhance ITA LIVE 2020 Content and Coverage
- How SMBs Can Compete in Digital Ecosystems in the 2020s
- 4 Ways Insurance Can Prepare for New Data Privacy Laws
- Brewer Lane Ventures Launches and Hires Insurtech Vet Martha Notaras as Managing Partner
- 2020 GIA Cohort Launches on January 14
- The November/December 2019 ITA Pro is here!
- Electronic Chat with Joshua Snead
- Electronic Chat with Wendy Aarons-Corman
- Simplifying the Move to a Third-party Print Provider
- Take a Business-Driven Approach to Continuous Improvement for Core Systems and Processes
- Electronic Chat with Ron Glozman
- Guidewire’s Data Guru Mike Byam on How Insurers are Using Internal and Third-Party Data
- Electronic Chat with Russ Bostick
- Electronic Chat with Rock Schindler
- Electronic Chat with John Siegman
- Electronic Chat with Martin Burlingame
- Insurtech Landscape 2019: Top 5 Takeaways
- Grinnell Mutual Tackles Massive Transformation -- in Stride
- A Candid Conversation with Paul Mang
- SageSure Insurance Managers Improved Competitiveness by Consolidating Payments to a Single Digital Platform
- Digital Does Matter in Insurance-- And Insurers are Missing the Mark
- The 22nd-Century Insurer: Taking a Cloud-First IT Approach
- The September/October 2019 issue of ITA PRO magazine is now available in digital format here:
- ITA Pro Magazine May/June 2019
- Spotlight on the 2019 IASA Conference
- ValueMomentum Selects Erie as Site of Regional Development Center
- Capgemini and Majesco Become Alliance Partners
- Electronic Chat with Dr. Dan Shoham
- Electronic Chat with Todd Greenbaum
- Martha Notaras: The “Outsider” with an Amazing Inside View
- Electronic Chat with Larissa Tosch
- Martha Notaras Will Join ITA LIVE 2019 as a Keynote Speaker
- Five Things to Consider When Evaluating Your Cyber Risk
- ITA Pro Magazine, January/February 2019
- Synergy Between Insurers' IT and Analytics Teams Key to Operationalizing Insights, Says Novarica
- Major Ransomware Attack Could Hit U.S. with $89B In Economic Damages
- ITA Announces 1st of Three Keynote Speakers at ITA LIVE 2019
- Electronic Chat with Jeroen Morrenhof
- Legacy Systems Are Dead. Really? Don't Count On It.
- Now Accepting Nominations for the 2019 ITA Bridge Awards
- It's time to register for ITA LIVE!
- Registration is Now Open for ITA LIVE 2019!
- What to Expect from a Digital Experience Platform Implementation
- ITA Pro Magazine September Edition is Now Available
- It's National IT Professionals Day
- Save the Date for ITA-LIVE 2019
- OneShield Software and UrbanStat Work Together to Improve Real-Time Analytics and Risk Decision-Making
- ITA LIVE 2019 - SAVE THE DATE!
- Insurance Technology Association Announces New Editor-in-Chief
- August 2018 Edition ITA Pro Magazine is Now Available
- Enterprise Architecture in an Agile World
- Top 10 Tips for Securing Your Mobile Devices and Sensitive Client Data
- Industry Insight: 4 Global Insurance Trends in Digital, Data, Content Services and Security
- Diving Deeper into Prioritizing Your Strategic Digital investments
- Why Content Rules
- How Mass Personalization Will Open the Small Business Benefits Market
- At Year End 2017, Will Your Organization Be Protected from Cyber Risks?
- Do Insurance Bots Dream of Mitigating Risk?
- Conditioned to Respond
- Managing & Mobilizing Insurance Data in a Connected World
- Race to the Finish Line
- New Tools, New Opportunities in Claims
- ITA LIVE: Reaching Insurance Industry Crossroads
- Advice to Insurance IT Leaders: Keep Your Eye on the Ball
- New Date, Venue for ITA LIVE 2017
- Guidewire Makes Major Push to Small and Midtier Market by Acquiring ISCS
- Insurance Disruption is Happening Right Now
- Insurity Adds Strategic Investment Partner, General Atlantic
- Beyond Transformation: The Convergence of Finance, Risk, and Actuarial Functions
- The Rapid Evolution of Consumer Protection Regulation
- Talent Hunt: Finding, Attracting, Retaining Top People
- Insurers Flexing Their Distribution Models
- Technology Driving Disruption in Insurance
- Fear of ‘Next Bubble’ Challenges Life, Annuity Carriers
- Technology Allows Commercial Lines Insurers to Stand Out
- Single Sign-on Viewed as Biggest Tech Challenge for Agencies
- ISCS Observes 20th Anniversary; Scurto Predicts Major Changes Ahead
- Policyholders and Their First Impressions
- Progressive Making Progress on the UBI Front
- High and Dry: Insurers Search for Disaster Recovery Plans
- Insurers Sign The (Un)Dotted Line
- Reflections of a Retired Insurance CIO
- Mobile Device Management Just One Answer to BYOD Issue
- Lessons from GEICO and Progressive on Winning the Critical Buying Stage
- You Are a Target for a Cyber Attack
- Web-based Systems are the Next Evolution in Claims Technology
- Gaining a “Wow” Experience from Web Users
- Time to Shift from Business/IT Alignment to Business/IT Alliance
- Healthcare Insurers Changing to Consumer Model
- Organization is the Key for Selecting Software Vendors
- Analysts Expound on the Needs of the Mid-tier Insurance Market
- Finding the Cure for Obamacare’s Website
- New Software Solutions Benefit Insurers on the Inside and Outside
- Products, Market Impede Investment in Systems for Life Insurers
- Combatting Cyber Threats: Predict, Prevent, Persist
- The Future of Telematics Heads Beyond Insurance
- The Shame in Cyber Security Lapses
- Building Policy Administration Systems for the Future
- Insurers Look Into The Eyes of Their Policyholders
- It’s a New Dawn for the ITA
INSURANCE IT NEWS
- SIMON Adds Brighthouse Financial to Annuities Platform
- EIS Partners With esure Group to Expedite Its Digital Transformation
- Carpe Data Partners with Unqork to Help P/C Insurers Improve Automation
- Vertafore and Nationwide Partner on Commercial Submissions to Improve Market Connectivity
- Next Insurance to Acquire AP Intego
- Buckle Adds Crash Risk Data from TNEDICCA to Auto Insurance Underwriting
- Donegal Selects CoreLogic’s P&C Claims Workflow and Management Solution
- Zelros Raises $11 Million in Series A Funding to Bring AI-Powered Responsible Insurance Distribution to North America
The Email Chat is a regular feature of the ITA Pro magazine and website. We send a series of questions to an insurance IT leader in search of thought-provoking responses on important issues facing the insurance industry.
ITA LIVE 2020
ITA LIVE 2020 –SAVE THE DATE!
April 5th – 7th, 2020
The Diplomat Resort
Become a member today to receive updates – www.itapro.org/MR
BLOGS AND COLUMNS
You have surely heard it said that small businesses are the growth engine for America. Today, the phrase has a special ring to it for benefits... READ MORE
With stagnant growth and lingering low interest rates, the life insurance industry faces a challenging future... READ MORE
Finding insurance carriers willing to write commercial lines risks has always been a challenge for producers... READ MORE
As Guidewire Software prepares for the start of Connections, its 11th annual user conference that begins on Nov. 2, Brian Desmond, chief marketing... READ MORE
COVID-19 has accelerated digital adoption, especially in the areas of claims adjustment and fraud prevention... READ MORE
- Vendor Views