14 April 2014Life

Process and approach

Re/insurers are increasingly considering means to streamline their operations, speed up underwriting decisions and improve analytical capabilities. Here the EY panel discusses the opportunities.

Moderator: Chris Maiato, principal, EY financial services

Panellists: April Galda, COO, Ariel Re; Sandy Sposato, executive director, EY financial services; John Vale, principal,
EY financial services

Chris Maiato: As companies develop strategies for growth, what operational challenges do they face?

John Vale: Some of the major hurdles from an operational standpoint are frictional costs, being able to scale your business to a growth strategy. Whether that strategy is acquisitional or organic, it is about being able to have efficiency and consistency in the processes, in order to be able to scale up that profit and revenue line while maintaining your cost line level, or increasing only at a marginal level.

I worked with several insurers who took a very acquisitive approach and what they found is the ROEs look really good on paper, but what they are actually doing is increasing their cost base to a point where it was breaking their whole process, their P&L and their balance sheet.

So now what they are doing is going through strategies to try and reduce that cost, doing things such as consolidating underwriting operations and business simplification, strategies to make sure they are maintaining a profitable growth strategy while keeping operations in check.

Sandy Sposato: Finance organisations are trying to figure out ways to be more efficient and to improve their operations. What they are looking at is improving their business processes and being more efficient in the ways they deliver financial information, but also looking at the technology component and considering ways to enhance their technology.

April Galda: With the headwinds going into 2014, companies are being obliged to do more with less. So some of the things that we have done within Ariel are to look at where do we have existing infrastructure and underwriting that we can deploy elsewhere. For example we have had a property insurance business here. It was not a big cost to roll that out into London to get closer to clients and multiple jurisdictions, relying on the existing infrastructure. Those are the kinds of pretty simple business decisions that people can make when you have something that you can scale.

I co-chair our new activities committee, so any time we are doing something new within Ariel it will go through a vetting process by management. This is then followed by a vetting committee which consists of risk, operations, finance, legal and compliance. The people on the ground driving growth can sometimes be forgotten or get handed something to then go and implement, but if you have not gone through the full process to understand really how much is it going to cost, how many more people are going to be needed, or how it will impact the business, you can end up with a very different economic situation for this once promising new line of business. That has been a way that we have tried to add a lot of operational rigour to pursuing new lines of business.

Vale: We have worked with a number of insurers who are looking across the gamut of cost reduction opportunities. It can be simple low hanging fruit such as consolidated procurement services.

Another approach is location strategy, which explores issues in terms of cost and location and whether firms should consider moving some of their operations into lower cost locations.

Sposato: There is a lot of focus on standardisation, centralisation and also looking at what elements of the financial organisation make sense to potentially move offshore. The firms that can do that most effectively are those who can really analyse what is going on in their organisation, look at their activities and then think about where it makes sense to do those key activities.

Those that have struggled have probably been too focused on cost reduction and are just not considering things from an efficiency perspective. They have struggled then to move those back and at the end of the day have probably seen an increase in costs before they have seen a decrease as a result of what they tried to do. The theme is to reduce by trying to centralise and standardise.

Galda: I want to make one comment on costs that is probably not popular, but when we go through all of our operating expenses, compensation is the biggest one. Bermuda has a tremendous number of advantages, but it is an expensive operating platform especially for larger operations. I expect over the next two years the market will see more hard decisions being made on the compensation side, not just where do I put someone, but how much do I have to pay someone in the seat today to come into work.

In terms of growth there is very much an over-supply of capital, and some of that is an axe that the brokers have. It is a pretty effective axe. In that environment rates are down, the question is what are the costs? Are there additional new lines of business in emerging markets and how can you find niches before the rest of the world does?

Maiato: It sounds like looking at new products and new product innovation. Do you feel that organisations are spending enough on innovation in this era of cost containment or is it getting overlooked?

Galda: Sometimes there are times to retrench and make sure you are staying close to clients, to be very careful from a risk perspective and dig in, while pockets within the organisation can be focused on innovation.

Vale: There is a tremendous focus on underwriting, it is a huge expense in an organisation, but it is also where the revenue comes in. So every minute that you can have an underwriter focus on the core underwriting tasks is a minute well spent. Moving lower value, non-core activities outside the underwriter’s remit is naturally of benefit.

Another big trend that is accelerating is a move to establish consistency around underwriting processes and providing underwriters with better access to data. There are initiatives afoot trying to provide underwriters with better information both internally and from external data sources.

Others are trying to create a new front end for their underwriters so they can be more efficient. Still, a lot of organisations are struggling with how much time it takes for an underwriter to get the information, assess the risk and make a decision.

Some of these new technologies allow you to take a look at that risk with a complete picture of what the account looks like. You can do some interesting analysis in terms of overall risk, risk categorisation and being more thoughtful in the underwriting process.

Maiato: As part of the benchmark we examined large cost areas of finance from an underwriting standpoint. We have seen finance costs reduced year on year. Can you comment on what you are seeing in the market and what has been most effective?

Sposato: Finance transformation is a bit of a misleading term because it means different things to different people. It can be looking at one small piece of your organisation, or it can be trying to build something for which it will take years to see the outcomes.

What we are seeing in finance from a cost reduction perspective is similar to the finance transformation space. From a cost reduction perspective companies have started to put systems in place that have allowed them to simplify operations and enhance processes to make organisations more efficient and reduce overall costs.

Maiato: Can you give an idea of the adoption rate out there? How many organisations are you seeing out there that are going through this and how many have achieved success versus getting a lot of pushback from the finance and underwriting function?

Vale: A lot of organisations are struggling to gain traction. I have had a lot of conversations around operating and underwriting models and what they should optimally look like.

Depending on whether it is an acquisitive company, there are some fiefdoms that inevitably have to be negotiated. But the conversations are happening, being able to talk about what we want to do in order to scale up the business. I have seen more of that in the last couple of years than I have in the previous five.

Sposato: The operating model is really what is underlying those changes. Taking a look at what people are doing, who should be doing what in which piece of the organisation and how to improve their ability to do that.

Regarding the clients we are working with in insurance, there is a lot of activity around the broader transformation of finance. Years ago the hot button issue was replacing general ledger systems and making sure they could produce their financials more efficiently. Most insurance organisations have done that and their focus now is on how they can get that information sooner. The focus is on ways to grab and analyse data more promptly and is on the back end from a reporting perspective.

Maiato: How will this technology and big data help companies achieve profitable growth, or are we too soon in the cycle to see its effect?

Galda: From the underwriting side that is where we are finding some of the biggest advantages. The volume of data these days is tremendous. As of late, our data needs are doubling every year. The challenge is how to analyse that data in an efficient way, and what sort of systems do we put in place to get that information into our underwriters’ hands in a simple format.

We also found that you need to consider which changes will have the most impact—there may be some processes where when you analyse the cost of automation or of getting the nth degree of data it is not worth doing.

Vale: Some insurers are trying to bite off too much, trying to cleanse everything, but this simply is not possible. It is important to pick spots of opportunity.

Organisations need to think about aligning their data and what they want to do with it, to stratify what they are trying to achieve, whether it is growth, underwriting, or data around underwriting, in order to better analyse and come up with future strategies.

Sposato: Something all insurance organisations struggle with is legacy source systems that have been around for years. In theory you want to get the data, you want to get it sooner and you want to make sure the quality is there, but in reality trying to pull it out of some of those source systems becomes a major task.

They need to focus on where the biggest issue is from a finance perspective. It is not only the quality of the data, it is also about improving the efficiency of finance processes. It is about being able to close their books and do it more effectively, but it is picking the battles around that.

Maiato: A lot of insurance organisations have developed through M&A and growth. Complexity seems to be implicit. Is there something to be said for the simplification of the business?

Galda: When you have processes that are too complex to manage you will have problems. You need to have an organisation that management is able to manage and a consideration of what are the business lines and functions in which you have an edge.

Vale: One word comes to mind when I think of simplification—agility. Being able to react to and be responsive to the market. We have done some work recently that has shown that companies are generally more successful when there is agility and simplicity in their business. But you cannot simplify just for simplification’s sake, those companies that really focus in on it can do well if they keep that agility in mind.

Maiato: We have heard a lot about the evolving role of the CFO to be more of a business partner. What does the future hold for finance and what do you think a finance function will look like?

Sposato: The business partner role, that business partner title that is out there now, is what we are seeing around the future of finance. Finance organisations have traditionally been behind closed doors crunching the numbers.

A lot of organisations have pockets of finance within their business operations, but they are largely back office functions. The future of finance will be more central and will be focused on helping the business better analyse and understand its results and how to improve them.

Vale: I have seen organisations where they have that business partner role and the feedback from the segment areas were fantastic. The finance business partner is able to make informed decisions and understand the financial ramifications, it’s quite remarkable to observe it in organisations where they have done that.

Sposato: Those people who have taken the business partnering roles have tended to struggle. It is going to take a while for people’s mindsets to change. The successful organisations have tried to put the right people in those business partnering roles to have a slant towards the business with the finance angle and finance lens, but partnering challenges remain. It won’t happen overnight.