Integrating finance and actuaries for FP&A in L&A

We often see FP&A organizations owning planning processes end-to end, including defining the PB&F calendar, aggregating the financial results, developing actual versus plan variance, reporting analysis, and executing forecasts. While FP&A works with functions and business unit leaders from across the enterprise to collect inputs, the creation of the plan or forecast can be a siloed exercise with each group only considering their part of the collective story.

This approach can result in several shortcomings:

• Limited integration and collaboration between FP&A and actuarial functions can result in different versions of projected figures or disconnected top-side adjustments with no cohesive storyline.
• In communicating plan and performance results, the FP&A function may have trouble owning the end-to-end story of the projected figures and deviations in actual results.
• FP&A typically owns top-down target setting and the processing of last-minute plan adjustments identified by leadership. Given that bottom- up planning processes often exist in silos, FP&A may have a difficult time updating the aggregated bottom-up plan to meet updated top-down guidance.

FP&A organizations are mainly using programs like Microsoft Excel to execute their plans and forecasts, effectively bypassing key capabilities offered by leading performance management solutions. This underutilization of technology makes planning, budgeting, forecasting, and reporting processes more difficult and less efficient. Planning cycle lengths can be as long as six months in cases with heavy dependency on Microsoft Excel and lack of integration with actuarial tools.

Challenges related to lack of technology use include:

• The use of forecasting to speed up and simplify planning processes is limited.
• Driver-based models are primarily limited to select expense line items and aren’t used to connect operational and financial plans.
• A lack of time in the planning or forecasting cycle to run different scenarios.
• Disconnected valuation and forecasting models limit the ability to drive stress testing/scenario analysis for the enterprise.
• A lack of connected solutions to enable collaboration and information sharing between FP&A, actuarial, and other functions.
• Cumbersome processes for the explanation of results given the dearth of effective dashboards, tools, and capabilities across all business and data elements.
• Change in reserve.
• Complex processes to determine the allocation of investment income to a product level for the explanation of performance and results can be overly complex, may differ across products, and is often highly manual.

Leading FP&A teams typically own financial target setting and drive expense planning. While overseeing planning and reporting calendars, communication, and coordination, they must work closely with business functions such as actuarial, investments, and tax. Together, they must drive the integrated development of projections and management insights. Leading insurance organizations need to further facilitate teaming, processes, and tools across business functions to enhance capabilities and insights within F&A and actuarial teams. FP&A teams should explore adding actuarial personnel to their teams to help answer questions and “tell the story of the plan,” collaborating with business units or other functions when necessary.

• FP&A teams should have a strong understanding of underlying assumptions and targets across product lines.
• FP&A teams should consider adding a business partnering group where individuals are assigned to different functions and business units.
• As actuarial valuation models become more granular and principles-based, these models can be fully integrated into the planning process to represent current best-estimate actuarial assumptions, valuation requirements, and to better enable sensitivity testing within the PB&F processes.

Planning, budgeting, and forecasting processes should enable agile decision-making and on-demand scenario modeling. Once the right organizational structure has been determined, the processes should have the following characteristics:

• Integrated operational/financial drivers and models.
• Extensive use of driver-based and cognitive models for planning of expenses and other components where the actuarial models can’t be relied on as a sound fit for prioritized planning needs.
• Cash flow projection models linked to actuarial models with the actuarial output, providing enhanced sales, scenario, and what-if planning capabilities.
• Forecasts that include both the current year and 2-3 out years for a continuous long-term focus and support for year-over-year comparisons.

FP&A and actuarial teams are only as strong as the data and tools that support them. Technology solutions should consist of the following:

• An integrated environment where top-down targets and allocations feed actuarial and FP&A models. Actuarial model outputs feed FP&A tools to enable a connected planning environment.
• Capabilities to quickly simulate various outcomes such as shifts in sales volumes, interest rates, or surrender rates.
• The ability to drill down into data details to pinpoint variances in results across all aspects of the plan.