Financial planning for insurance companies during COVID-19 has been saved
Leading-practice organizations begin the planning process by setting strategic guidance, translating the guidance to targets, and disseminating those targets to business units. Global organizations may want to consider a different approach this year. While financial markets are globally connected, the manner in which countries are responding to the crisis is not.
The speed at which business overseas will be able to execute in a somewhat "business-as-usual" fashion will differ from that of the US economy. As such, corporate FP&A teams with a global business footprint may be better served by building a planning calendar, where local teams submit ranges based on the likelihood of potential outcomes. After reviewing the ranges submitted by the local teams, corporate FP&A can develop and disseminate targets informed by local conditions to yield a more realistic, effective outcome.
Many organizations conduct planning by having business units submit a select number of targeted scenarios (for example, high, medium, and low) before identifying the most likely scenario and finalizing a single set of financial results. Rather than trying to arrive at a single number, organizations should consider identifying a range of outcomes with special consideration paid to the bottom of the range (worst-case scenario). Leading-practice organizations can use observed volatility to bolster ranges with assigned probabilities, allowing leadership to plan for a wide variety of possible outcomes while considering likelihood of occurrence.
Leading-practice organizations use driver-based plan logic to tie financial outcomes more closely to underlying economic and organizational drivers. In times of increased volatility and minimal historical precedent, driver-based plans tend to have an inherent advantage over their simpler, trend-based counterparts. While trending may have been sufficient in the past, historical results may no longer be a reliable indicator of future performance in today’s volatile economy.
Organizations should look to expand driver logic, as appropriate, throughout the planning process and rely on input from those in the organization who are closest to each respective driver when establishing scenarios and plan ranges. (Note: This does not mean organizations should try to make every plan item driver-based. Materiality should always be considered—if a line item makes up less than two percent of the total plan, even a 200 percent actual-to-plan variance may not move the needle). An increased reliance on external economic drivers should also be considered during periods when activity is heavily influenced by market forces or economic shocks. For example, setting gross domestic product (GDP) as an external driver, a company can identify that if GDP decreases 10 percent, the top line is expected to be within a specific range. As GDP shifts throughout the year, forecasts can be adjusted based on actuals and to verify the predicted ranges. The plan for next year will likely be as dependent on external economic drivers as internal ones.
Reviews of financial plans typically take place over two to three staged rounds. During each round, the executive team reviews plan figures in totality. Review conversations and meetings can be lengthy and unproductive. While the figures may change, the questions are often the same. What growth rate did each business unit assume? Why are expenses continuing to grow when our strategic guidance was to keep figures flat?
During such dynamic times, an end-to-end review cycle may yield ineffective discussions or lack feasibility from a timing perspective. Instead, organizations should concentrate each review session on a specific target, motivated by the current operating environment (for example, a shift in focus from profitability to liquidity, portfolio prioritization, and short-term expense management). By focusing the conversation, organizations can have the meaningful, targeted conversations needed to execute in a more analytical fashion.
