Integrating Risk and Finance for Good Business Sense
Author: Li-May Chew, Associate Research Director, Financial Services Advisory, IDC Financial Insights Asia/Pacific
This post follows my earlier blog on how mounting economic, financial and competitive pressures across the globe are driving insurers to seek greater collaboration between their risk and finance offices.
In a global IDC Financial Insights study commissioned by SAP to better understand these trends, we found that the most convincing reason for collaboration is to enhance financial forecasting. Indeed, two heads are better than one, with the support of flexible business analytics and valuation engines to manage a range of risk and finance requirements, including reporting, planning, and capital management. For instance, an insurer with greater awareness of its exposure to natural disaster risks within a geographic region and how it would impact capital will be able to make quicker, more informed decisions. Another critical driver is to enhance the timeliness, accuracy and completeness of information, and thus obtain a 360-view for effective decision making. The advantages of being able to respond more swiftly to regulatory requirements and to achieve cost savings from operating off common data sets are also spurring integrational activities.
Insurers’ Top Drivers for a Risk-Finance Integration
Going Beyond Paying Lip Service
While institutions need little convincing of the benefits of enhanced integration, they are still figuring out the most effective level of collaboration. Amongst the insurers we spoke with, 48% have consolidated risk with finance, albeit a handful (9%) professed to be currently well-integrated and satisfied with the results. When we make reference to integration – we are referring to collaborative initiatives around capital project evaluations, globalization strategies, financing decisions and budgeting. Nonetheless, it is heartening to note that another 39% of respondents are one stage behind and ironing out their integration kinks, while 35% have concrete plans to achieve consolidation in the coming months.
Conversely, only 13% point to a lack of formalized implementation plans, while just three interviewees or 4% admitted to having no near-term risk-finance policies. These insurers without integration plans may have a pessimistic viewpoint that alignment is practically unachievable. For instance, one might feel that if risk was called upon to influence the profit-and-loss decisions, tension and conflicts would arise and lead to a more unproductive environment.
Extent of Progress in Implementation
While there is almost unanimity in the need for coordinated interactions, the interdepartmental partnerships of these insures are still largely in transition, and finalizing on a desired level of integration remains a challenge. I still have more discoveries from this survey to share, and my next posting should be able to shed some light around the technological innovations that will enhance the risk-finance collaboration for our readers. Look out for that final installment!