How to Best Utilize Forecast Accuracy in the Office of Finance
Insurance finance practitioners know the drivers of an efficient planning and forecasting model. Unfortunately, they’re often difficult to build: Often, finance leaders face long cycle times, with thousands of hours spent in planning cycle. Sometimes, data integrity issues prevent them from trusting the data. In many cases, their systems are too difficult to use, either because they’re overly complicated or because they’re unstable. And on top of that, many companies have too much dependency on tribal knowledge. Whatever the reason, you need your planning and forecasting to work so you can stay profitable.
Let’s look at what takes a typical forecast process so long to complete. One major prerequisite for a forecast is a legal entity plan. To complete that plan, an insurer must first derive the operational plan. Doing this in either an enterprise planning system or in conjunction with offline excel models, you can expect it to take roughly 9 to 12 weeks. Next, the company must go through an exercise to account for its products through product-based allocations. Add on another three to five weeks. And depending on the type of insurer, they may need to undergo more downstream multi-step allocations, account for intercompany adjustments, make reinsurance adjustments (if applicable), and finish up other miscellaneous adjustments for another three to five weeks.
Bottom line: The annual operating plan can take as much as 22 weeks to create—close to half a year. In the time it takes to make your plan, both your strategy and economic conditions can drastically change, making your original plan less valuable. On top of that, this estimate doesn’t include time for collaborative planning, driver-based assumptions, analysis, or review with necessary management and leadership.
There are better ways to build your model.
This is where the introduction of modern enterprise planning systems can make a big difference for your company—and it’s especially important for insurers. Your primary KPIs are controllable expenses, revenues, losses, and cash flow transparency. If you can get to these numbers quickly, you’ll have a strong start for a faster planning process.
We recommend a consolidation model like the one below with a driver-based profit and loss (P&L) outline which pulls from various ‘spoke’ models. These models are where key data sets are housed, such as underwriting (GWP projections, earnings), allocations (divisional/corporate expenses, actual), controllables (associate-level workforce planning, RSUs, office space), and likely other associated inputs. With these consolidated, you’ll have a summary starting point.