Today’s insurers are faced with many challenges, including a low-interest-rate environment, price transparency, regulatory changes, customer cost-consciousness, complex IT landscapes, and increasing operational costs.

Add to this the rising cost, number, and frequency of claims. In 2017 the UK’s largest insurer, Aviva, paid out more claims than ever before – with 97.2% of all claims accepted, totaling £900 million. Meanwhile, the average cost of motor insurance claims has hit an all-time high in the UK, while others are feeling the knock-on effects and costs associated with natural disasters and climate change. One German reinsurer paid out more than ever in 2017 ($135 billion) owing to a succession of hurricanes, earthquakes, and forest fires in North America.

So, it’s not surprising that the combined ratio of many insurers is not improving and, in some cases, is hitting levels above 100%.

Many insurers are buoying up their profits with non-insurance income such as investment income and fees. For the overall reporting of profit, this might serve to mask the underlying underwriting results, but it does not address the underlying costs of the business. The way I see it, there are many efficiencies and profits to be unlocked in the business, especially when it comes to finance excellence. Achieving a detailed view of financial performance is one sure-fire way of unlocking value, helping the finance department become forward-looking, and providing proactive support to the business operations.

The state of the finance function

Digital disruption is the norm these days, for businesses and consumers alike. But one thing arguably being left in the dust is the finance function. Despite being the gatekeepers of a business’s most critical data – and, ultimately, its bottom line – it’s typically bogged down with fragmented, manual, and paper-heavy processes. Digital uptake is slow, partly because it feels like there’s a mountain to climb from the current state. And it’s partly because many finance leaders don’t realize that the technology designed specifically to improve the finance function – to help finance become a key player in business strategy and decision-making – is already available.

Despite being prompted by regulatory change, the UK is lagging when it comes to finance transformation generally – insurance companies being no exception. The finance function has remained an under-invested area of the business, with the priority tending to lie in other areas, like underwriting, claims processing, customer acquisition, and non-discretionary areas such as regulation. I’ve already explored the business improvement potential that can be gained from tackling IFRS 17 legislation in a strategic fashion. If anything, regulatory changes like these should spur insurance companies to improve their finance systems and processes. But there are technological barriers to true transformation, often leaving them grappling with manual processes and complex reconciliations.

The profitability and performance-management opportunity

One significant blocker to change is the fact that many insurance companies might not have invested in finance technology for a number of years – maybe even decades. More likely, they’ll have stitched things together and tinkered around the edges to keep things up and running. But now, there’s no denying that a step-change in capability is really what’s required.

As the cost of insurance claims rises and underwriting profits remain flat or, in some cases, decrease, it’s particularly essential for insurers to have a more detailed understanding of their own pricing models and the impact of those models on their margins. To do this requires a deep understanding of the costs of the various parts of business operations and the ability to allocate those costs at the most granular level. This would provide insight across the business as to the cost and profitability of different legal entities, business lines, geographies, individual contracts, and even individual customers.

Currently, most businesses allocate costs at quite a high level, simply because their existing systems don’t lend themselves to granular levels of allocation. But by using technology, a move away from fragmented processes towards truly granular, real-time, automated cost allocation finally becomes possible. Armed with this, finance departments can provide data to the business to drive strategic decisions, amend pricing approaches, and ensure more predictive financial performance.

Samsung Life Insurance is an example of an insurer that deployed a new technology to support the level of granularity it wanted for cost allocation and profitability analysis. Because of this, Samsung has increased operational visibility, agility, and speed by gaining a better understanding of the costs incurred in a business’ core operations. This also means being able to explore insights around how those costs can be attributed to individual products or regions, and so on.

Technology makes it easy to see which are the most and least profitable areas of the business, to a very granular level, and support the best underwriting pricing and customer acquisition decisions. End-to-end process automation can addresses a traditionally fragmented cost-allocation process in insurers, with many manual and system hand-offs, and enables the process to run in hours rather than days. This can also enable real-time insight and significantly faster processing of high volumes of granular data. As a result, the finance and operations teams would have more time to support business planning and forecasting during the time now available and can make more accurate and valuable predictions about the performance and profitability of the business in the future.

These efficiency gains, as well as better forecasting, planning, analysis, and insight into the business’ true performance, are the holy grail for the insurance industry. There’s no insurer that wouldn’t want that. The challenge is that it can sometimes seem difficult to see how to get from the current reality of an overly complex and manual processing environment to an automated, efficient, data-rich capability.

With the right technology approach, this holy grail is available today offering a very real opportunity to achieve this target state – and for finance departments to become a forward-looking service that provides targeted information and highly effective support to other business functions.

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