As agile risks become the latest business cliché, we take a look at what agility could mean for the finance function within insurance and reinsurance companies and argue that it is the only sensible way to address the challenges the function faces.
The agile approach was first devised in the context of software development before being adopted more broadly as a project management methodology. At first glance, it might not appear to have much to do with the finance function of an insurance or reinsurance company. But, if you take a closer look at what agile» boils down to, you will start to see the relevance.
Formulated in terms of the finance function, the principles of the agile approach could be summarised into something like this:
- Don’t let your ERP system define the way you work
- Regulators and auditors require comprehensive documentation, but remember that being compliant is an important constraint, not a primary goal
- Put your internal and external customers at the centre of your work
- Favour responding to change over following a plan
Basically, this translates into an approach to developing solutions to problems iteratively that values human communication and feedback, adapting in line with change, and producing working results [1].
[1] Shubham Gupta, What Is Agile Project Management? An Expert Guide (Capterra, November 2019).
Why do insurers need an agile finance function?
Considering the dynamic challenges finance functions in the insurance industry currently face, this is precisely the kind of agility they need: a less rigid, more flexible approach that’s geared to solutions that work for the business rather than being preoccupied with the processes and tools used to arrive at them.
Our clients are transforming their organisations, and they are becoming more agile. But finance is often not part of the transformation equation. That’s a shame because insurance finance functions operate in a complex and rapidly changing environment.
CFOs and their people have to contend with ongoing regulatory changes (think IFRS 17) and evolving shareholder expectations (e.g., the need for new information on matters, such as ESG). Finance chiefs are expected to play a role in supporting strategic management, and their teams are required to provide effective support to daily business, as well as much more information. With all these complexities, people in finance need expert knowledge and the right skill set.
If finance functions do not adopt more agile approaches, they will find it increasingly hard to address these challenges effectively, as the cost of finance operations continues to mount. They will never be able to rid themselves of troublesome manual approaches, and they would not be able to produce the insights needed to effectively steer the business.
At best, this is a wasted opportunity. At worst, it could mean that the finance teams become mere number-crunchers who do not add value, but only serve as a cost centre fulfilling regulatory requirements.
What does agile finance look like?
Ideally, finance should be a reliable partner that drives business development and growth initiatives. It should be able to digest changes in core systems seamlessly and without manual workarounds. It should also be able to adapt quickly to business changes, such as new products and services, and provide the insights necessary to track their development.
The ideal finance function also has the ability to integrate new regulations without major development needs or an increase in resource capacities. Last but not the least, it should be capable of providing real-time analysis and business insights.
Why is finance not agile already?
First, as we have already argued, it is because finance functions (not least in insurance) simply haven’t been aware of the relevance of an agile approach to them. Once you gain this awareness, you start to see how far most current finance arrangements are from the agility they would need to provide flexible responses to business needs, without breaking the budget.
Current finance setups mostly feature complex system landscapes with tactical solutions and manual workarounds (end-user computing). The prevailing cultural mindset puts stability before innovation, focusing on audit requirements and keeping to a routine closing process. Often, the workforce is fragmented, with finance activities outsourced, meaning CFOs lose control over the full finance value chain.
Added to this, the operating model is often based on the outdated notion that finance only delivers a retrospective view, with a corresponding emphasis on external financial reporting, rather than focusing on supporting business growth. Data sources are fragmented, and there are data quality issues, all of which make data unfit for detailed real-time analysis and steering the businesses, making it difficult to handle growing volumes of data.
Another serious problem is that functions, such as actuarial, financial accounting, and financial planning and analysis (FP&A) don’t work together closely.
What needs to change?
If all these sounds bleak, do not despair. There are proven approaches to making the finance function more agile, revolving around systems and technology, data, organisation and processes, and people:
- Systems and technology (digitalisation): modern finance systems, fully integrated but decoupled for easy replacement, leveraging the latest technologies, including automation.
- Data (storage and management): a central finance data repository, robust data quality and security management, full upstream and downstream data integration, automated controls and reconciliation, sophisticated reporting, and analytics solution to analyse the data and generate insights.
- Organisation and processes: agile organisational structures implemented along with the required processes to match the new organisational setup (this could include DevOps).
- People: finance personnel trained in agile working methods, cross-functional teams, networks instead of hierarchies, and innovation culture.
We will be looking at these approaches in more detail in the next articles in our series. Stay tuned!