A perfect storm is brewing across the global insurance industry. Unless you have been hiding under a rock these past years, you would know how the volatile markets and intensifying profitability pressures from mounting consumer expectations and regulatory requirements are driving the entire financial services industry to revisit their value propositions and seek new, sustainable avenues for grow.
In fact, there is a huge rally call for financial institutions - and insurers included - to realign strategies in response to these changing industry dynamics. And one such avenue that is beginning to catch attention is to explore the possibility that enhancing interdepartmental coordination between risk and finance could raise return on investments.
To better understand how this partnership between risk management and finance functions is evolving and if there are any key differences across various regions, SAP commissioned IDC Financial Insights to undertake a global study across 10 countries.
Over the last three months, we interviewed 75 leading insurers across Europe, Middle East and Africa (EMEA), the North Americas (NA), Asia/Pacific (APAC) and Latin America (LATAM). Respondents were decision makers from the risk management and financial disciplines and include chief risk officers (CROs), chief finance officers (CFOs) and their deputies, with more than half of our respondents representing mid-size to large insurers with annual gross written premiums in excess of US$500 million.
These aggregated survey results, our analysis of the global and regional trends, and essential guidance for insurers will be published in an upcoming IDC Financial Insights White Paper to be released by month’s end. By sharing the results and lessons learnt, we hope to have our readers incorporate these best practices when they themselves begin their own journey towards better interdivisional collaboration.
So, why a focus on the middle/back office functions of risk and finance?
Well, it was not too long ago when financial institutions deemed the CRO's role as a "nice to have" and not mission critical. However, the global financial crisis of 2008-09 presented us all with a rude awakening, and today's complex risk environmentis setting the stage for risk heads to ascend into the top echelons of management. Insights from a senior risk executive are now needed, as much to ensure day-to-day compliance at the process level, as to steer the strategic course of their businesses.
The role of the risk office is not the only one that is maturing in virtually every area. Responsibilities of financial practitioners are also elevating in importance, with many of whom we spoke with noting a shift beyond the traditional focus on transaction processing, financial reporting and tax compliance. Their roles have indeed gotten more interesting, and responsibilities broadened.
For example, amongst others, finance heads are now tasked to implement robust financial performance management, and expected to collaborate with the risk office to ensure insightful analytics and improved financial forecasting.
Organizations are Redefining the Roles of Risk and Finance
As these risk and finance officers up their seniority stakes, their teams have to deal with several core issues. These include added stress from new or expanded regulatory risk requirements, and continued macroeconomic uncertainty, as indicated in the chart below. While some risk and finance heads may hesitate to make key investment decisions now, they do need to proactively respond to both regulatory developments and evolving economic conditions. They are also expected to focus on beefing up their accounting teams, enhancing corporate governance and disclosure frameworks, and raising compliance expenditures.
Our conversations further revealed that insurers need to keep in synch with ongoing technological evolution. For instance, those who want to stay ahead of the game will need to implement advanced analytical tools for better business insights. Adopting processes to facilitate enterprise information management and centralizing data modeling for quality and efficiency are also key business future-proofing strategies.
Insurers' Top 3 Risk or Finance Pressures
Note: Mean scores are based on a scale of 1-5, where 1 means the least and 5 means the most severe pressure. Source: IDC Financial Insights Global Insurance Survey on Risk and Finance, 2014 (with 75 respondents from unique organizations)
There is plenty more findings to share, so stay tuned for further research insights. Over my next two postings, I shall be revealing more interesting snippets from our survey results, including what factors are driving risk and finance to collaborate on an integrated platform, and how successful these have been. I will also highlight the technological innovations that will enhance collaboration.
Being able to effectively consolidate risk and finance for strategic business and technology decision making requires a complex balancing act for which the "ideal" extent of integration is always under review,. These would undoubtedly be interesting and illuminating findings, not only for our readers from the insurance community, but for all organizations seeking to reap the rewards from better coordinated risk and finance interactions. So do watch this space for my follow-up posts!
Note: IDC Financial Insights' White Paper (Risk-Finance Collaboration at Global Insurers: A Partnership in Transition) will be available from end-July. If you are from a financial institution, do write me at [email protected] to request for a complimentary copy.
Posted by Li-May Chew