Making the Business Case to Upgrade Planning, Budgeting and Forecasting Capabilities

The latest economic downturn exposed long-standing gaps in the planning, budgeting and forecasting (PB&F) practices of some insurance carriers. To some extent, these processes had been afterthoughts within the finance function of insurance companies for a long time. Yet, regulatory oversight, the globalization of markets and increasing operational complexity are placing a new spotlight on PB&F capabilities.

A business case for upgrading PB&F is largely based on automating and streamlining the tedious and time-consuming tasks of data collection, which frees up time for higher-value activities, such as analysis. However, to realize full value from investments in PB&F, insurers should recognize that a methodical, holistic approach is required. The temptation to leap right to technology implementation as a panacea for all that is wrong with the PB&F function must be resisted. Critical process, organizational factors and underlying data issues must also be addressed for PB&F transformation to be truly successful.

Internal challenges to effective PB&F

Many insurance executives complain that their PB&F processes are overly complex and time-consuming and are not applied consistently across the company. The results may not focus on accurate information or timely and important measures of performance and are typically out of date by the time the data is ready for consumption. Thus, they offer little predictive value, which limits carriers’ ability to respond confidently to changing market conditions and increases the possibility of poor strategic decision making.

Data challenges, organizational issues, inefficient processes and fragmented technology continue to be major obstacles to outstanding PB&F performance. Often insurance companies lack transparent management information, with each functional unit relying on its own set of numbers, processes and systems. Responsibility for performance data is ill-defined, so there is little or no accountability for ensuring accurate inputs into plans, budgets and forecasts.

This “multiple versions of the truth” scenario is particularly dangerous in the insurance industry, as the underlying data forms the basis for important decision-making capabilities in things like underwriting, actuarial and investments, billing and claims. Those insurers able to share accurate information easily across functions give themselves a significant advantage in the marketplace.

Given these issues, it’s easy to see why the development of the PB&F process in the insurance industry lags the level of sophistication when compared to other sectors. Unifying standard data structures and sources and implementing integrated data transformation processes are essential to reliable, time-saving information production. They will also enable improvements to enhance areas like scenario modeling, sensitivity analyses and driver based forecasting and budgeting.

External forces equate to opportunity A number of market drivers, such as intense competition and increasing regulation, have also forced PB&F to move up the agenda for finance executives at insurance companies. While the challenges are many and the need for action is urgent, it is important to note that there are many potential benefits from improved PB&F, including:

• Enhanced performance management capabilities
• Increased visibility into and across operations
• More objective and data-driven decision-making
• Greater executive focus on higher value tasks
• Increased responsiveness to external factors
• Lower regulatory risk
• Higher ROI from existing technology (e.g., ERP)

Interestingly, the business case for investments in new systems will likely be built on more quantifiable benefits in other areas. Nearly all insurers who undertake PB&F improvements will realize marked improvements in terms of increased worker productivity, the elimination of manual processes and reductions in the resources necessary to prepare budgets, forecasts and reports. Necessary investments are usually funded by savings in these areas.

Successful change programs and transformation initiatives start with a clear and methodical approach and thorough planning, with project execution guided by several leading practices. We'll discuss those further in our next article, which will appear on insurancetech.com within a week.