The insurance industry and the world at large have changed dramatically over the last 24 months. Understanding the current digital landscape is key to developing an optimal transformation strategy.
- COVID-19 accelerated digital transformation of all organizations. Driven by increasing customer expectations and the necessity of providing remote work capabilities, companies sped up their transformation journeys anywhere from six months to several years.
- Growing competition from fintechs and tech giants. In survey after survey, insurance leaders see fintechs and technology giants, like Amazon, as the most significant competitive threats to gaining new customers. Traditional insurance players need to become more agile and innovative, and deeply engaged with customers. To do so, they must be totally committed to the cloud, embrace pioneering new technologies, such as artificial intelligence and blockchain, and reorganize their organizations to put the customer at the center of all they do.
- Pending regulation changes require new digital capabilities. The arrival of Long Duration Targeted Improvements (LDTI) in the United States and the International Financial Reporting Standard (IFRS) 17, both due to hit in 2023, impose extensive reporting requirements that will require digital system upgrades for most firms. Companies can choose to make short-term improvements to meet the requirements or use this as motivation to perform a more extensive overhaul.
- The race to market. Business and consumer customers demand products be introduced and updated more quickly than ever before. Top-tier insurance players use digital analytics to predict profitability of new offerings, innovate and collaborate on designs quickly, and iterate once the product or service is in hands of customers giving feedback.
In short, being digital is no longer an aspirational goal to drive efficiencies at some date far off in the future. Digitalization is now table stakes to be competitive in the market. This is not news to most chief financial officers (CFOs), controllers, and other finance leaders who have been taking initial steps to prepare their organizations to move to the cloud. But they also recognize their digital journey is just starting. The key challenge they face using digitalization to make their departments agile, responsive, and deeply analytical to support the growth of the business.
FUTURE STATE: WHAT IS DIGITAL FINANCE TRANSFORMATION?
The future finance ecosystem, combined with advanced ways of working, such as design thinking for product development and Agile software development, will empower finance to become experimenters and innovators, spending most of their time on valueenhancing activities, such as: • Proactively identify and mitigate emerging risks across the organization. These can include everything from the ramifications of new international tax law to the consequences of social and economic disruptions. The speed and depth of cloud-based tools allows finance leaders to see threats on the horizon much more quickly and launch proactive programs to mitigate harm.
- Recognizing opportunities to grow revenue and lower cost through data-inspired insights. These could include identifying lines of business to spinoff as well as analyzing the financial strength of acquisition candidates. Increasingly, insurers are looking to develop new lines of business outside their traditional offerings, and finance will play a critical analytical and financing role here.
- Delivering strategic business insight by leveraging tools, such as scenario modeling and predictive analytics, to inform business strategy.
- Using distributed ledger technology, like blockchain, to provide immutable, fully reliable transaction lineage with auto-executing events and automated accounting capabilities. Financial transaction data is automatically propagated to the general ledger in real time with 100% reliability. Blockchain-enabled contracts and policies can be updated instantly to reflect new risks and expedite cash flows.
- Communicating and influencing both within and outside the organization. For example, finance leaders should be at the forefront of conveying the latest business analytics results to department heads and suggesting specific actions to capitalize on that information. The CFO can be an impartial, deeply informed counselor recommending the best decisions regarding risk, profitability, and growth throughout the organization.
THE JOURNEY: CREATING THE FINANCE TRANSFORMATION
To start, finance can use six levers to begin moving on their digital journey while still realizing quantifiable benefits in the short to medium term.
- Assess your digital finance maturity A necessary first step is a self-assessment that looks at specific measures of maturity in finance along four key dimensions: automation, data, cloud, and ways of working (See self-assessment questionnaire).
- Automate with intelligent robots for many insurance organizations, RPA to handle simple, routine, and repeatable tasks has put finance on a starting path toward digital transformation. Companies behind the curve must gain ground quickly. RPA is a valuable teacher because it forces organizations to become clear on their automation goals, governance requirements, and expected benefits.
- Detangle data Insurance companies drink data like whales ingest water: sloppily and in volume. Even with RPA, too much time is wasted within finance correcting and synchronizing data issues across systems and functions. It’s imperative to develop an optimized data governance model specifically for the finance department. Finance, not IT or individual departments, should be the driving force to get data 100% clean and reliable, delivered to wherever it’s needed, and in the proper form. Hiring and retaining much-in-demand data specialists will be a crucial challenge for the CFO, as will codeveloping with IT robust strategies around data storage and security. These steps will power innovation and value creation within finance.
- Use cloud as an enabler The finance function of the future has a necessary home: the cloud. Moving to the cloud means using cloud-native applications, scalable architecture, and pay-as-you-go tools. Public and hybrid clouds can be significantly more secure, resilient, and cost-efficient than proprietary on-premises data centers. Most finance leaders are familiar with what the cloud is and how it operates, but let’s revisit features that pertain particularly to finance and that allow finance to drive digitalization through the organization.
- Culture is the glue that holds the digital finance function together. Business done in the cloud is not business as usual, and organizational change must take full advantage. Senior management in general, and the CEO and board, must drive digital transformation through the organization.
- Invest in environmental, social, and governance (ESG) issues Over the last decade, businesses and their investors have paid more attention to bolstering their environmental, social, and governance (ESG) programs. According to the CFA Institute2, this trend has accelerated in the wake of global warming, the COVID pandemic, and growing gender and racial inequality. These present a shared risk to insurers, communities, and businesses alike.
Just from a business perspective, insurance companies are already hip-deep in rethinking risk in an era of climate change. S&P Global Ratings’ research3 estimates that 60% of S&P 500 companies own assets at a “high risk” from the physical impact of climate change. Part of the risk elevation to insurers also comes from regulators pushing firms to embed and report on ESG within their organizations. A growing number of international standards, regulations, and best practice frameworks incorporate ESG requirements with which insurers must comply. For finance, these include the Task Force on Climate-related Financial Disclosures, the Biennial Exploratory Scenario (BES), and Solvency II.
CONCLUSION: BUILDING THE FINANCE TRANSFORMATION
The digital transformation of finance should have been at the top of the change agenda for most insurance companies over the last few years. Now, in the post-COVID world, digital competence is table stakes required to compete effectively. Across all lines of insurance, companies are investing heavily in developing pioneering new products, acquiring and divesting business lines at a rate never seen in the industry, responding to increasing regulatory oversight, and answering calls for ESG initiatives. Insurers not only need digital tools and capabilities to meet those imperatives, but an agile organizational structure that speeds up decision making, moves closer to the customer, and, most of all, supports innovation at speed. Welcome to the New Finance. But the story isn’t just about transforming one department. In the 2020s, finance needs to be a powerful business partner spinning off real-time data, insights, and risk assessment, driving the entire organization’s journey to becoming a digital enterprise.