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Finance

Top 6 concerns for CFOs

Insider Engage explores some of the key challenges that may be keeping the insurance industry’s financial heads awake at night

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It has been a tough 12 months for the insurance sector. Like all businesses, the industry has had to weather lockdowns and economic uncertainty and has also seen many of its client companies and sectors face unique challenges.

Even as the pandemic ebbs, the insurance industry’s chief financial officers (CFOs) still have plenty on their plate in 2021.

In an informal poll, industry advisers unanimously put capital at the top of their list of challenges for the coming year – most notably, understanding the extent of their liabilities – but regulation, the wider economy, technology issues, and the search for talent also feature heavily.

1. Liabilities

Assessing liabilities over the course of 2020 was always going to be difficult. After being battered and bruised by the impact of Covid-19, CFOs need as clear a view as possible of the landscape over the coming 12-18 months.

“CFOs will be ensuring they have sufficient capital to meet unquantified liabilities,” says Leo Beckham, managing partner at TigerRisk Capital Markets and Advisory. “My sense was always that the 2020 results were not the full picture and there will be further developments to come.

“The quantum of liabilities going forward is still quite a way from being fully understood. And it will go on being so for a period before we have any confidence of where things are going to land.”

For (re)insurance CFOs with shareholders, Ofir Eyal, partner and managing director at Boston Consulting Group, adds a gentle warning: “There will be slightly less understanding from the investor community now if you have not got your head around what kind of exposure you are looking at.”

2. The economy and strategy

The economic outlook remains uncertain, though there is a consensus that interest rates will stay low.

While CFOs have been grappling with this challenge for many years already, the pressure is only building on them to find yield for their asset portfolios without adding unnecessarily to risk. The wider economic fallout of the pandemic has also yet to play out in full.

Andy Moore, Lloyd’s and London market leader at PwC, points to the second half of 2021 as a potentially decisive period: “No-one can predict the future, but as we start to see business failures there is the potential for insurance business losses that will follow that.

“There are more business failures to come and until such time as the significant government support is fully withdrawn from business in the second half of this year, we will not know the exact scale of that.”

While the future remains uncertain, CFOs will still need to have a view and strategy. Eyal at Boston Consulting believes the time for crisis management is over.

“There is a need to go back to long-term strategic planning,” he says. “The industry has been involved with short-term management of the crisis for a long time. The world still looks very uncertain, but we understand what this world looks like from a business planning point of view.

“For example, we understand what another wave of lockdown might look like. It is about trying to navigate within this crisis; trying to make more strategic sense of the world we are in.”

3. Operating costs

Even before the pandemic, costs were the leading concern in the industry; the bottom line was becoming a major headache for insurance companies.

A 2021 outlook report from EY declared that insurers should “strengthen their current financial position through rigorous cost optimization and effective capital allocation”.

Boston Consulting’s Eyal agrees there is more to be done: “Quite a few insurers still have a lot of fat. They will be looking at cutting costs within the finance function, but they are also in the driving seat of cost-cutting across their organisations.”

Many CFOs will baulk at the idea of cost cutting, and may prefer EY’s “optimization”. However, even optimization means trimming the fat somewhere - either to save money or to reallocate it to areas that need investment. The industry is not short of challenges that will need cash.

4. Looming regulation

The new International Financial Reporting Standard for insurance contracts (IFRS 17) has been a long-time coming and has been delayed twice, but is now scheduled to take effect on 1 January 2023.

Life insurers face the most work, but PwC’s Moore says the issue for non-life insurers should not be underestimated.

“I think people could implement IFRS 17 in 18 months, but if you have to carry out major system changes it could be longer,” he warns.

Another regulatory challenge facing CFOs in all sectors is the implementation of new audit rules. The UK’s Department for Business, Energy and Industrial Strategy (BEIS) has this month (April) issued a white paper outlining possible regulations that have been compared to the US Sarbanes Oxley rules, imposing more direct responsibility on directors for accounting procedures and reporting.

The consultation ends in July and any new rules are not expected to take effect until 2023. However, it would require senior executives to personally attest to key accounting procedures and reporting. “My guess is that CFOs are going to bear the brunt of this,” says Moore.

5. The digital challenge – technology and talent

Staying competitive in technological terms is now a constant issue for insurance firms and one in which failure to innovate can have drastic consequences.

EY’s recent report on Next Wave Insurance delivered a stark assessment: “In an era of technology transformation and data-driven disruption, our sector has been held back by operational inefficiencies and outdated systems.”

Amid the pressure on costs outlined above, there is also a demand for digital investment. For CFOs, the most pressing need for that investment may well come from their own departments.

For example, the regulatory demands of IFRS 17 are mainly in the form of data – lots of data. For many, this will require significant investment in IT systems and security, a further challenge to cost management.

At the same time, technological upgrades may require new skillsets. According to Boston Consulting Group’s Eyal, demand for finance managers with the rights skills and knowledge is putting CFOs and human resources departments to the test.

“A lot of our clients are mentioning a shortage of talent in a world where the systems are very different,” he says.

6. Offices and work practices in the ‘new normal’

The world of work after the pandemic is a challenge facing executives in all sectors and departments.

CFOs are responsible for how their own departments will operate after lockdown, but must also assess the resources needed for their entire organisation.

Many finance staff may have enjoyed working from home, but others will not, and the new normal may have to strike a balance that allows both to thrive.

CFOs will also have to assess the spending needed to implement these flexibilities on a more permanent basis. A wholesale emptying of offices in EC3 is unlikely, but with some employees working remotely there may appear to be the opportunity to reduce some overheads. This may also be a two-edged sword, however.

“It may not be as simple as it first appears,” says PwC’s Moore with respect to office space rationalisation.

“While you might not have much need for office space, the space you do have may have to be configured differently. You might have decided you do not need one of your floors of space, but that space might be needed in a different way, for meeting rooms, remote conference spaces and so forth.”

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