The future of the finance function - part 1

Under the weight of regulatory demands, insurers' finance functions have struggled to deliver the insight that the business needs – and that they want to produce – as financial officers and controllers discuss the part one of this InsuranceERM / Aptitude Software roundtable

Chris Cundy: What are the main challenges facing finance functions?

Ross Chapman: I see a bit of a perfect storm. CFOs and their teams have run out of time. The finance function in many large enterprises is having a hard time serving all the backwards‑looking statutory reporting requirements and doesn't find it easy to deliver forward‑looking advice to the business. 

Colin Charles: I know we have just climbed the mountain of Solvency II pillar 3 reporting, but I have seen so many businesses just looking backwards now, and it cannot be right. My hope is that with all the pain that people have gone through with pillar 3, we can make use of the data in there. If you have good data analytics, then potentially finance can come out of this with lots of helpful information.

Anna Miskin: Management are craving insight, but regular reporting tasks take priority. Sometimes we don't have capacity or skill to interpret data and make good sense of it for management. The hope is that in the years to come, we will be able to almost fully outsource the mundane reporting duties to machines, and focus on transforming data into the forward‑looking, decision‑relevant information, but of course this is a big task.

Chris O'Brien: I suspect a lot of that data exists within the finance world and we are not sharing it.

Anna Miskin: ... or sharing with actuarial or pricing, and these functions are working in silos.

Chris O'Brien: That is why we have to break down silos and take the data and insights we have to the CEO. We have to say, 'Hey, look, did you know this about what we have here?', because people appear to think, 'finance or the actuaries will get on with that and then we will do something better afterwards.' 

James Cooper: There have been a lot of events this past year that have put the finance function under pressure. We have had to deal with Brexit, such as managing the currency fluctuations and putting in place hedges; we have had to deal with visits from the regulator because they have become more interested in having client money controls. At the same time, the business has an expectation about how finance can embrace technology and provide insight.

"We have people almost 'seconded' to the business as finance business partners. They do not just go to some meetings, they are pretty much immersed in their partnering business area."
- Anna Miskin, VitalityHealth UK

A bigger contribution

Chris Cundy: What would you be like to be doing more of? 

Chris O'Brien: The real job satisfaction comes from contributing to the business. When we are stuck for large parts of the year filling in backward‑looking returns, we do not have the time to do that forward‑looking value-adding consulting. For many of my stakeholders, they thought the year-end was done by January and it was not! 

Anna Miskin: If I had more time, I would spend it on forward‑looking, what‑if type analysis for the company at large. For example, the focus of product development in the actuarial function is on the profitability and value generation of the product itself. However, I also want to know what it is likely to do to my business mix, acquisition costs, liquidity, capital, competitive position and so on.

Joining up information and knowledge from finance, pricing, actuarial capital management and risk would be a very good thing. Then we could get quick answers to simple commercial questions such as, 'So, what do you think I should pay to acquire this business?' 

James Cooper: We have been asked quite often this year to help with M&A. The business wants the finance view, but it is complex to understand a business, and what costs and revenue synergies there might be on integration. 

It's incredibly time consuming, but on the positive side you work very closely with the business and deepen the relationship, which is part of how you move forwards with finance as a business partner.

Colin Charles: There is a danger that you are asked to do things and you cannot do it as well as you would like to because the regulatory returns have to be the number one priority. So you stop being asked. Finance professionals need to push those doors back open again and say, 'Yes, we can do this.'

Ross Chapman: This is why we're passionate about finance. I always view the CFO as having the keys to the kingdom. Many industries such as insurance, telecoms, banking and healthcare have become characterised by high volumes of business, with multi‑national operations, serving customers with complex contracts, and finance is the only function within the business that can be a strategic advisor to the business, using its data to unlock value.

"There is a danger that you are asked to do things and you cannot do it as well as you would like to because the regulatory returns have to be the number one priority"
- Colin Charles

Ideal characteristics

Chris Cundy: What characteristics should the finance function possess if it is going to be a business partner?

Chris O'Brien: You have to think like the business; you have to understand what they do, why they do it, but maintain your distance and not 'go native'. Be close to them, sit with them sometimes, go to their meetings and really learn what drives them and what they are interested in and connect that to what, as a finance person, we are seeing and what skills we can offer to them to solve the problems they have.

Anna Miskin: We have people almost 'seconded' to the business as finance business partners. They do not just go to some meetings, they are pretty much immersed in their partnering business area. There's always a bit of a risk that they go too 'native' and lose the ability to challenge, which I consider a significant part of a business partner's role. However, I am getting really good feedback from the business and believe that this is a genuine win-win partnership. We are business partnering with IT, services & operations and marketing, which are the biggest cost consumers in our business. 

One thing I learned - you have to dedicate these people. Business partnering cannot be something like a contact centre, where a business comes and asks for help and whoever is available picks it up.

Colin Charles: I totally agree: it has to be a formal structure. And it is an expensive way of doing things, but it is the only way that you are really going to get under the skin and demonstrate the value of the finance team. 

James Cooper: We have an entrepreneurial culture at Lockton and we see the business partners as being an important analytical resource for good decision‑making. There is a lot of empowerment at various levels throughout the organisation, so it is about making sure that there is some consistency in the way decisions are taken that is aligned with our strategy.

Chris Cundy: Does it happen the other way around at all, where people are seconded into the finance function? 

Anna Miskin: I wish it were happening more often because, for example, in my organisation finance is very data driven and reliant on actuarial support. I could do with more data analytics, actuarial and clinical risk resources seconded in.

Chris O'Brien: It is not something in my experience but I can see benefits of doing it. I can see it being difficult, though, because we need certain skills in the department. But more crossover can only be good.

Ross Chapman: Are things like IFRS 17 and Solvency II driving the actuarial function and finance closer together, and improving the ability to better understand and serve the business with linked-up data tied to business performance?

Chris O'Brien: I think so. We have always had a good relationship with the actuaries because we are interdependent, we share data, we input and peer review each other's work, but I think Solvency II has made that essential.

Anna Miskin: In my team, anything which is related to actuarial reporting and capital is within my remit. So I manage a team of actuaries alongside a team of accountants; that is probably because I am not just an accountant, I am also an actuary. This has proved to be a good partnership because pretty much every management decision which has financial consequences has a capital impact as well, so you cannot manage them separately.

"With the very soft market across virtually all lines, it may explain why there is more pressure now on finance's work."
- James Cooper, Lockton

Product development

Chris Cundy: How do you get involved with product development? Will someone come to you and say, 'We have this great idea,' or will the finance team generate ideas?

Chris O'Brien: I would like to think it was the latter, but in my own experience it is more the former. People come to us and say there is an opportunity and we would work with actuaries, capital modellers, we would model what the opportunity could look like into the future, what its capital requirements would be, how it would sit in our reinsurance programme, what the costs of acquiring the individuals to do that business would be, the acquisition costs and so on. 

Colin Charles: The only time that changes is when a business has a pool of cash looking to make acquisitions or organic development. A finance function can have its own M&A or research centre, whatever you call it, and be proactive. Generally, 'we had better ask finance to see what they think' is third or fourth down the list, whereas it can be a prime driver.

James Cooper: With the very soft market across virtually all lines, it may explain why there is more pressure now on finance's work. More people want to understand what is going on in their business and how they can lift their margin. 

Chris O'Brien: And it is not just about adding product; it could be about withdrawing from product, or scaling back because conditions are very tough in some areas.

Read part 2 here.