Transforming insurance financial planning

New accounting regimes have brought about new key performance indicators (KPIs), and the drivers of earnings are changing. New disclosures offer a great deal of information and insights that did not exist before. For metrics used by the FP&A function that are tied to an accounting basis, it is critical for the FP&A team to understand the new dynamics of emerging earnings and how best to integrate with the financial reporting process to generate such KPIs and messaging in a timely fashion.

There continues to be industry development on emerging KPIs as investors and regulators digest the first sets of financials and disclosures under the new accounting requirements. Also, to the extent internal financial performance metrics are tied to key accounting figures, in the case of reinsurance transactions, LDTI and IFRS 17 may result in a certain level of accounting mismatch between direct and ceded business causing P&L to emerge in a way that is not perfectly aligned with real-world economics. Understanding how the accounting mismatch unfolds and how the resulting P&L should impact performance metrics have continued to be a topic of consideration for the FP&A function.

Due to the requirements for enhanced disclosures under LDTI and IFRS 17, as well as the granular valuation requirements, companies are now sitting on top of a “gold mine” comprising insurance financial data that is significantly more detailed and voluminous than ever. This is evidenced by the rising popularity of insurance sub-ledger solutions across the globe. There are tons of insights that can be harnessed from such a gold mine that did not exist before, and it would be a waste for that amount of data to be generated and thrown away just for accounting compliance purposes.

There is an opportunity for FP&A leaders to modernize the usage, accessibility, and storage of insurance data. It is in FP&A leaders’ best interest to capitalize on the momentum from accounting compliance and turn it into something lasting and real by leveraging what has been achieved and building into a future state of value-driven finance function. It would allow for more reliable and timelier what-if analysis if the insurer possesses the capability to bring together operational and financial data and marry investment and liability data. With access to a wealth of insurance data, FP&A leaders could also investigate solutions with generative AI and machine learning features to enhance its financial forecast capabilities.

FP&A is often expected to be proactive in providing the financial forecast and provide real-time analysis to inform business decisions. Unfortunately, what often happens when results from the financial close are somewhat unanticipated due to a multitude of potential factors is that FP&A must scramble and react post-close to modify the full-year forecast. It is even more so with the less predictable financial results under the new accounting requirements. This needs to change, but it can only change if FP&A fully appreciates the accounting changes and is equipped with the right tools to perform forecasts in a more automated and streamlined fashion.

The financial reporting and valuation processes have changed in reaction to accounting changes. Insurance companies have strived to maintain the same or a similar workday timetable during the financial close cycle. However, the FP&A piece of the puzzle has not been fully incorporated and pressure tested.

FP&A could benefit from stronger and seamless integration with the operational data and financial reporting data, enabled by technology to help ensure real-time connectivity to the actuals, to allow for comparison to plan and forecast, and facilitate necessary timely updates. Carrying forward the momentum from the financial reporting side, the connected and continuous planning nature of FP&A should also adapt and evolve to enable better financial projections by leveraging advances in the FP&A technology space.

As FP&A leaders take a fresh look at the planning process to adapt to the impact of new accounting regimes, it is also important to rethink the modeling approach. More actuarial involvement is expected given the less predictable nature of the financial results and a stronger need for drivers of earnings analysis and sensitivity runs. Additional focus may emerge on the trade-offs between speed and accuracy, and simplicity and granularity.

While accounting changes typically do not directly alter the overall strategic objectives of insurance companies, new accounting requirements such as LDTI, IFRS 17, and PBR are leading to changes in the what (i.e., KPIs) and how (i.e., how FP&A integrates with other functions) from an FP&A perspective. To build industry-leading FP&A practices and perform continuous planning with both foresight and hindsight, it is important to ingrain FP&A partnerships across the organization, especially with valuation and reporting, on both processes and capabilities.

Moreover, the new financial disclosures introduced with LDTI and IFRS 17 have galvanized a thirst within market analysts to unlock new trends and earnings drivers. They are pouring over the new financials to discover if there are any new ratios or metrics to better understand the story. FP&A leaders are uniquely positioned to own the messaging and financial narrative to guide the market analysts and deliver meaningful financial understanding and company valuation.