The days of the CFO as a behind-the-scenes finance wonk are over.

Today, insurance CFOs sit shotgun to CEOs, responding to questions about return on equity (ROE), renewal retention rates, combined ratios and loss adjustment expense ratios. In an increasingly complex market, finding answers is more difficult than reporting figures.

Further, shareholders now look to the CFO to answer questions not only about what the company has done but how it will improve, essentially putting the CFO in the transformation leadership seat.

Given the CFO’s visibility into the growth and profitability of all segments of a company, this is extremely well timed.

Why insurance needs transformation leaders

Financially, the industry faces real hurdles: Investment returns have fallen since 2012 because of the low interest rate environment. Despite a slight bump last year, rates remained 15% below their 2007 peak, and aren’t expected to improve significantly in the near term. Return on equity for P&C insurers has also declined over the past decade, trailing banks, Fortune 500 companies, and life insurance companies, providing a 7.1% return on average vs. the 13.9% accomplished by the Fortune 500.

Premium growth won’t save the day. The Insurance Information Institute predicts flat to modest deceleration in premium growth and flat to slightly negative renewals in 2016.

Transformational CFOs have surveyed this landscape, examining potential technology disruptors such as drones and driverless cars. They realize that their industry was built on managing risk; the insurance industry is unlikely to be noted for its leading position in leveraging emerging tools such as advanced automation, AI, digital technology or real-time predictive analytics to transform operations. These forces affect risks across operations, including their customers and the underwriting itself. They can’t afford doing things the way they’ve been done in the past.

In response to complicated issues such as low interest, antiquated systems and 21st century pitfalls, CFOs realize their unique perspective allows them to act as a transformational change agent, bridging the gap between traditional finance and change strategy.

Growth- and transformation-focused CFOs must be leaders who pro-actively suggest strategies for generating healthy balance sheets and ratios they can proudly report to Wall Street.

Transformation starts at home with F&A

Finance and accounting (F&A) and external and regulatory reporting now comprise a smaller part of the CFO’s focus. Today’s CFOs aspire to direct 75-80% of their time on synergistic, strategic and business improvement agendas.

CFOs who expect to demonstrate transformational leadership understand the need to transform their finance function first. Leading transformation within the CFO’s own functions demonstrates their skills in transformational change, giving them the credibility to lead and inspire change in other areas. A streamlined and more analytically-driven F&A function provides CFOs with the necessary visibility into the company overall to support across the-board macro-analysis. Analytics plays a key role here. When embedded into F&A operations and combined with strong data visualization tools, predictive and prescriptive analytics harness the numbers and block out the noise, enabling data driven decision making.

Insurance F&A departments are not immune from the inefficiencies found in other business units. Multiple instances of ERPs, premium or claims systems can wreak havoc on reporting, or the manual workload of a single-instance ERP can limit personnel from efficiently performing other key functions. Other issues can include unaligned business units, inconsistently measured service and quality levels, and an inability to measure processes against industry benchmarks.

Transforming key F&A processes takes time. However, inventions like automation, including robotic process automation, cloud platforms and analytics, along with old standbys like Lean Six Sigma and benchmarking, can improve processes and reduce time-lines to delivering value. CFOs can also look to third parties to provide Business Processes as a Service (BPaaS), in which the technology and services are bundled together at a lower cost and implementation risk.

The journey to an internal F&A transformation starts with a future state Service Delivery Model (SDM). A successful SDM focuses on discovering inefficiencies, reducing cycle times and improving accuracy. Tools leveraged by the SDM include:

  • Business process automation, including robotics process automation, reducing the need for personnel performing routine processes, such as data entry.
  • Embedded analytics enabling operational decision making mapped to desired business outcomes.
  • Standard Six Sigma and Lean techniques identifying process improvement opportunities performed “end to end” to maximize the results.
  • Outsourcing, frequently under a BPaaS model, of more detailed and transactional work.

Once the SDM is implemented and optimizing the F&A function begins, CFOs can turn their sights to the broader company, leading the drive to improve the expense ratio. CFOs have the visibility for tackling the expense ratio in a methodical, analytical manner, particularly in high impact areas including claims expense, operating costs and underwriting.

Claims, claims processing and other operating costs

A recent FICO PCI survey found that 32% of insurers said the portion of falsified claims is as high as 20%. A combination of analytics, automation and processes can target common signs of fraud. Analytics can red-flag claims with specific combinations of variables. For instance, it can identify signs of soft fraud, such as adding a physical therapist and chiropractor to an existing personal injury claim. Updated systems, can suggest courses of mediating these various automated flags, such as independent medical examinations, to prevent unnecessary medical bills. All of this can be accomplished while also improving the overall cycle time of claims process – critical to an improved customer experience.

One U.S. P&C insurer successfully predicted workers’ compensation cases that were likely to be fraudulent. This company used analytics to flag questionable claims for review, saving $12 to $14 million a year. The CFO should make sure that the organization is using the right tools, techniques and appropriate resources to prevent fraud.

The CFO’s team can also pinpoint instances where the operating results expose the greatest inefficiencies, allowing them to suggest critical areas for process improvements. Advanced analytics can empower P&C companies with invaluable data: How long do certain claims take to resolve? What are the risks of subrogation or litigation across all current pending claims based on previous experiences? What is the chance that any given claim will result in a sizable payout?

Answering such questions has saved major carriers millions of dollars. For example, one U.S.-based P&C insurer analyzed data such as claim characteristics, legal expense drivers, and attorney skills to predict whether a claim was best handled by staff attorneys or pricier external counsel. The carrier realized an annual savings of more than $100 million. One large P&C company noticed the endorsement process took 21 days. This delay created unnecessary incremental internal costs and frustrated customers. Re-engineering reduced the time to five working days, resulting in happier customers, a likely improvement in customer retention and internal processing cost savings.

Improving the underwriting function

The underwriting function is another department that can benefit from a C-level led transformation. These fixes require a mix of tools and techniques, but the benefits are substantial.

We find that underwriters are spending 30% of their time on administrative-type tasks that should be re-aligned to an operational role. Revising the underwriting operating model allows underwriters to focus more time on revenue generating activities while accounting for nuances of different lines of business.

Other opportunities could include “fast tracking” the underwriting of some policies by segregating portfolios to create simple, rules-based policies that can be serviced by specialized operations teams. More than 75% of P&C insurers fail to invest in product tier analysis to find market opportunities that can be sold, underwritten and serviced with low risk, low cost and low effort.

Underwriting is rife with opportunities for automation and technology upgrades. CFOs will be uniquely positioned to weigh the costs and benefits against broader corporate goals and transformational initiatives. However, considering the tradeoff between receiving efficiencies now versus waiting for the promise of a large scale IT project to deliver benefits can be tricky.

“... underwriting is a key business component for insurers....”

In general, underwriting is a key business component for insurers that has experienced some improvement in recent years. This improvement is mainly due to the growing use of sophisticated data analytics which assess risk more accurately than ever before, and improving the speed of the underwriting process. Analytics can impact an insurer’s ability to accurately price policies and insurable products. CFOs can help their organization by making investments into larger data sets and analytical tools supporting the underwriting process.

Investment income

CFOs can also focus on investment income. In the current interest rate environment, improving yields without taking on undue risks can be challenging due to the limited number of options that align with a company’s appetite for risk.

Conclusion

In order for CFOs to step into a transformational role, they must equip themselves with the necessary tools and methods. Doing so enables them to provide leadership and generate strategies for navigating transformation today’s insurance environment. CFOs should consider the following as they begin their transformation journeys.

1. Define objectives

Transformation is never undertaken simply for its own sake. Before embarking on a change initiative, a company must define the issues it is attempting to resolve by setting transformational targets, rather than incremental improvements.

At the start of this process, take into account that business operations frequently evolve to create a latticework of constraints that employees and executives have learned to work around over time. Transformation at any level should start with defining change goals and making sure they’re tied to an expected ROI. This will help companies start to build a roadmap between the current state and the end state.

2. Assess organizational readiness for transformation

After examining what specific goals the CFO is attempting to achieve, they must evaluate whether they possess the tools to do so. This involves looking at the current state of their in-house and third party capabilities, and seeing which areas will require investing time and resources. Mapping out a defined time-line for how and when these additions will be made creates a clear picture of a company’s path to its desired end state.

3. Determine transformational tools and tactics

Once a CFO realizes which types of tools are necessary for this transformation to take place, they must evaluate the myriad solutions available. These can include business process management (BPM), automation (including robotics), and analytics. However, companies cannot pause their operations until these tools are implemented, and must begin evolving their existing processes based off their implementation. Due to the complexity of this task, it often entails partnering with a third-party provider. These outside resources can often assist with assessing and recommending the most effective way forward among a number of alternatives.

4. Examine employee talent

The transformational nature of the CFO role requires new skills. CFOs with strategic decision-making and communication skills, management backgrounds and global experience are highly valued by today’s insurance companies. To supplement or augment these efforts, many companies have begun initiating outsourcing arrangements with an emphasis on process transformation and analytics.

5. Maintain communication throughout the process

Communication with both executives and employees affected by the transformation is a necessary component of success. Introducing automation or BPM can create concern among staff members, who often worry whether these tools will disrupt their routine work-flow or make their positions redundant. Providing clear updates on project time-lines, expected benefits and positive results can demonstrate the value of the transformation process to both employees and C-suite executives, ensuring a smoother transition.

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