Financial transformation: A one-time only project or an ever-evolving situation?
10 February 2021
5minute read
Financial transformation isn’t new; companies and consultants have been completing projects ever since the first available actuarial focused software was released, but what drives the need for a project to take place? To determine this, we need to look at what the rationale and key drivers are for undertaking a transformation project. The old saying “if it ain’t broke, then don’t fix it”, unfortunately does not fully fit the insurance world. What can be perceived as not being “broken” could in fact be holding back the business, increasing running costs or putting the business in a difficult position for when the next regulatory change, new opportunity or unforeseen situation like a pandemic comes along. Ensuring that systems, models and processes in place are fit for purpose is going to be crucial to survive and stay ahead of the market.
Firstly, let’s look at the key reasons for when change would need to be undertaken to the software ecosystem:
Regulation
In the last ten years, two large scale regulatory changes have impacted the life insurance industry; Solvency II and IFSR 17. Solvency II has been in force for several years and IFRS 17 is due to be in place by the start of 2023. As much as insurers can hope for some level of respite from regulation change, with the impacts of Brexit yet to be fully established, likely repercussions from Covid, growing climate change reporting implications, and an increasing focus on customer data protection, regulation will continue to change to reflect the changing world. And so, with changing regulations come changing model requirements, meaning that insurers need to ensure their models and processes are in the best health to enable quick, simple, and cost-effective change.
Consolidation
As the trend continues in the industry for consolidation across companies and blocks of businesses, insurers are finding themselves in situations where they have access to multiple parallel systems. Maintaining these from both an IT and resourcing perspective can be very costly for the business; prompt rationalisation can help to unlock the economies of scale and business advantages sought from purchasing the business. Investigation and research should be completed into what the best tools would be, especially considering future business plans. If it is a one-time deal, then moving onto an existing tool will make more sense, but if there are multiple deals expected then the ease of bringing on board newer business may mean that switching current core systems to something more flexible is a better option.
Ensuring that the systems, models and processes in place are fit for purpose is going to be crucial to survive and stay ahead of the market
Market edge
Providing value for customers and investors is a delicate balance of opposing forces; profit for investors against security and low prices for customers. For the insurer, having the best models possible that provide detailed, accurate and timely information is critical to helping balance these opposing forces. By embracing new methods, cutting edge technology, and emerging software, differentials against competitors will become evident. These could take the form of reduced capital requirements allowing more investment freedom, more accurate premiums due to improved projection techniques or innovative ways of pricing and structuring products thereby opening up new markets and profit streams.
New software
Providers of software will always be looking to release updated versions of their offerings or create new tools based on new technology, either to provide new capabilities, increased speed or extra flexibility. Most providers will look to release something once or twice a year with supportable versions lasting a couple of years after the release date; ensuring you are on a supportable version is critical in case something goes wrong at a vital time. New software can also allow for increased automation or efficiencies in processes that may have been manual or IT intensive in the past. It can provide new avenues of insight, reduce physical costs, free up resource to add value into the business and help to reduce capital requirements through more accurate modelling.
What Transformation Approaches are available?
Given the variety of reasons for potential changes to existing system architecture there are different choices available. 4most have identified the three most popular options:
· Extending
· Enhancing
· Replacing
The universal aim is to either start doing something new or to replace inefficient, time consuming processes with something better that will satisfy one or more of the reasons for change previously identified.
Extend
Here, the goal is to look at extending the use of software or processes across the end-to-end process. This could be software or processes from your exiting product suite, from new vendors, or by using more functionality available in the existing licenced software suite. Areas where additional manual interaction is being required or increased amounts of data being passed from one department to another, for example, could be streamlined or automated to reduce time, but also free up resource to aid with checking and value-add analysis to further improve margins, better understand the business, and reduce operational risk.
Enhance
Enhancements to a process could be possible due to a number of reasons. As mentioned, vendors will look to continually provide updates to the software offerings which could include new functionality not present when the software was originally bought. It could be that during the original implementation the new requirements weren’t needed, or the time, budget or skilled resource wasn’t available. Also, the ever-evolving technology landscape has allowed once individual pieces of software to be connected or ‘wrapped up’ in workflow offerings, providing end-to-end governance, repeatability, and traceability. All of these allow you to enhance existing capabilities within the business to provide increased value.
Replace
As with most things, there is a natural end to the usefulness of software and processes, and as a business changes, requirements move, or alternatives emerge, an audit of whether the current ecosystem is still fit for purpose should be undertaken. It may be that parts of the process can be replaced with newer, more efficient, more flexible, more open tools that will benefit the business now whilst also offering some level of future proofing which can allow the business to take advantage of new opportunities as they arise. Replacement can be approached sequentially or as a single large-scale switch-over depending on the potential of changes to interrupt the business, increasing risks beyond acceptable limits or if costs need to be spread over time.
financial transformation is never going to be a one-time only project but has to be an ever-evolving situation that will constantly need to be monitored
Summary
With an ever-changing regulatory environment, fast advancing technology, desire to maintain a market edge and unknowns, such as a pandemic, for a company to survive and provide profits to investors, security to policy holders and continue to grow and develop, it should have a constant handle on the state and future plans of the software and systems in place. This will enable it not only to be agile and innovative but also to allow one of the most crucial aspects of insurance; pricing, projecting and valuing the underlying risks, to be undertaken in a cost effective, efficient and transparent way, ultimately ensuring future success for all involved.
