Reinsure the Back Office
The insurance industry is rapidly evolving. Disruptive companies are increasingly able to exploit the use of technology to create “Insuretech” platforms offering more varied and price competitive products than ever before. This change is being spearheaded not only by new start-up companies, but also by divisions of incumbents or companies formed through divestiture. There has been a shift to introduce products that no longer simply price risk based on historical behaviour but take into account actions during the period of cover. For instance, the past decade has seen an increase in telematics insurance for young drivers, with premiums payable based on a multitude of factors such as driving style, time of day spent driving, location and many more.
This apparent challenge is being handled by both specialist software products and in-house developed platforms. Constant attention is directed to improving the customer experience, customer journey, interaction with the platform and product set on offer; with the aim of organic customer growth and retention of the existing customer base. Artificial intelligence is being used to predict customer behaviours, adjusting initial and renewal premiums as required to meet the modelling criteria, influenced by observed activity pre and during the cover period.
However, all of the above activity has to be financially accounted for; month by month, quarter by quarter, year by year. Revenues have to be booked, direct costs to be accounted for and indirect spend has to be added into the mix. Capitalisation of the research and development costs of building and improving the operational “Insuretech” platform need to be captured and appropriately revalued and depreciated as required. It is this ever-present requirement that can pose a larger risk to a business than at first sight.
It is a common perception that the passage of data into an accounting platform must therefore be easily completed. The “Insuretech” platform handles the operational complexity of the business, performing appropriate financial calculations where needed. However, the legacy and smaller accounting systems in use in the industry are rarely directly connected to the front office platforms. This leads to a disjointed process as files are exported from the platform, manipulated in a myriad of spreadsheets to create the appropriate financial double entry, before being manually uploaded into the accounting system. This indirect process risks manual error, makes audit more difficult, and often adds to ‘spreadsheet hell’ experienced in many organisations.
Therefore, one of the most under-appreciated risks is to allow disproportionate business responsibility for data reporting and manipulation to sit with the finance team. Not only is there risk of error in the manipulation and posting of data, but the back office often reveals other inefficiencies. Month end processing times are longer than needed leading to delays in reporting packs and timely business information. Visibility and presentation of the metrics and KPIs can be reduced, often by the manipulation and aggregation required by the accounting packages.
Global reach and expansion of the business complicates matters further; a pivot which for many businesses happens much sooner in the growth trajectory when compared with prior decades. Global expansion and the launching of legal entities provide operational and financial complexity. Processes must now transcend not only company and departmental boundaries, but also geographic ones; often with local statutory and cultural needs. This complexity is handled in different fashions. Many businesses procure local tools or create duplicate instances of their HQ accounting system; only to find in due course that this approach compounds reporting and other inefficiencies. Other businesses tend to anticipate growth and look to procure a scalable solution ahead of trading in the new geographies, taking advantage of a simpler initial implementation landscape and scalable process framework.
Focus on improving and implementing back office systems need not deprive the business of its operational drive, improvement and growth. There are a number of key attributes that should be present in a business platform to support the “Insuretech” need.
Multi-Entity Consolidation, Visibility and Processing In Real-Time
Single database accounting solutions, irrespective of the number of legal entities implemented, deliver multifaceted ‘single version of the truth’ at all levels of the organisation. For C-Level executive and senior stakeholders, consolidated operational and financial KPIs can be seen in real-time at the click of a button. This means decisions can be made closer to the real-time data with a high degree of data confidence. Operational benefits see manual errors reduced and time redirected towards data analysis and interpretation, rather than raw transactional processing. Processes can be followed without ‘login/logout’ between companies reducing frustration and inefficiencies. Intercompany processes can be followed with very high levels of accuracy and efficiency especially for finance individuals or shared service centres.
Easily & Securely Integrated to Your Operational Platform
Look for an open and secure API architecture to integrate other platforms and data sources. By definition a ‘platforms’ allow for integrations to be built by technical teams without the necessarily the need for middleware software and thus additional costs. This means manual and spreadsheet-based Extract Transform Load (ETL) processes can be configured into the integration, saving time and reducing inefficiencies. Integrations are made easier as connection is only needed to be made to the single database, thereby allowing for a vastly scalable design should the number of entities or operational complexity increase in the future. The architecture is also futureproof, as the multitenant nature of today’s native-cloud applications means all customers are always on the latest version of the software. All customers avoid “version lock” associated with legacy infrastructure that sees the prohibitive cost and reimplementation of configurations and integrations to simply upgrade to the latest software version.
Lower IT Spend as a Percentage of Turnover
Native-cloud technologies delivered through Software as a Service (SAAS) business models deliver reduced cost and risk for many organisations. This is in stark contrast to the continued restrictions of non-native cloud applications, designed for legacy on-premise architecture, deployed in a hosted environment. This latter circumstance is often referred to as “Fake-Cloud”. Cloud-native and cloud-designed, multi-tenanted applications shift the burden of sunk and hidden costs of IT spend such as hardware purchase, maintenance, support and system upgrade to the software vendor. This delivers a lower total cost of ownership of software to customers and reduces IT spend as a percentage of turnover for the end customer. Simultaneously it allows business to redirect efforts towards the operational configuration of the software, rather than needing to devote significant resource to its architectural upkeep. Thus, the opportunity exists for the company to achieve the highest return on investment for the business from the software purchase.
Disruptive technology has affected many industries to date and will continue to apply competitive pressures to incumbents in the future. The insurance industry is no different. Companies that ensure efficiencies in back office systems, not only to support the more complex operational needs of pricing, customer management and other operational aspects, are more likely to have a stable platform upon which to grow. Organisational responsibility will be shared as the finance department will not have to deal with indirect methods of data delivery into an accounting platform. This in turn releases time to be used on data analysis and interpretation on information which has a higher accuracy, is delivered more quickly and at greater detail. This in turn can drive further organic revenue growth, or protect the revenue from existing income streams, ceteris paribus, leading to improved gross margin. It is time for the insurance industry to properly “reinsure the back office”.