Automating Insurance Accounting: Streamlining the Back-Office Operations for Efficiency Gains

The insurance industry relies on manual processes for financial accounting, leading to inefficiencies and errors. This blog explores the challenges of insurance accounting and how F3, a platform by Fennech, automates tasks to save time and money.

Coforge Property & Casualty (P&C) SME Vikram Singh asks industry leaders from our partner Fennech on how their product can help Insurance Carriers address key challenges, how they can help reduce manual effort, improve quality and drive down cost through automation.

Rob and Max, can you provide a brief background on Fennech and the F3 platform?

Fennech was created in 2017 to enable clients to automate their finance processes; for clients who may have multiple banking partners, this also means ensuring that they use one optimised process internally, regardless of which banking partner ultimately needs to process the payment or transaction. The management team are all senior individuals from insurance, banking and technology backgrounds, many of whom first worked together on a joint initiative to build a global clearing house for the insurance and reinsurance industries, so the challenges in this space are very familiar to us!

Can you provide a brief overview of challenges you commonly see?

Insurance carriers face significant challenges as they struggle to satisfy the ever-changing financial reporting requirements. The underlying systems used for accounting do not provide seamless solutions that automate the end-to-end processes, as such there is significant manual intervention resulting in time, risk and cost issues in matching and allocating aggregated cash movements on the bank statement to the individual underlying transactions

For the insurance carrier it is especially critical; thy must account for:

• Premiums received from their brokers or delegated authority network
• Commission disbursals.
• Processing of claims payments to policyholders both direct and via their distribution network

As such, Insurance carriers are looking to source and implement solutions that can automate their financial accounting, to provide visibility for improved decision support while eliminating the risk and potential costs of non-compliance.

With the COVID-19 crisis putting pressure on revenue due to falling premiums and higher claims there is an increased need for cost and efficiency savings. This situation is applicable for both coinsurance and reinsurance.

Can you talk us through a challenge that Insurance carriers face today?

One key concern for every insurance carrier is the handling of cash allocations in the books and records. This involves the accounting and reconciliation of incoming and outgoing cash flows between the insurance carrier and its participants (e.g. the insurance carrier, the broker, any participating co-insurers and re-insurers).

Payables and Receivables appear on the bank statement as single sums that represent an aggregated total of many underlying individual transactions, both debits and credits. Reconciling and matching which transaction belongs to which payment is currently a manual and laborious task which involves large numbers of people in the back office.

In addition, today the insurance carriers today are having to account for complex scenarios involving multiple parties, across multiple policies, all compounded by the increased levels of risk due to the nature and value of the sums insured. This means that accurate and timely information is increasingly critical.

However, due to the increasing complexities, the financial accounting platforms are struggling to automate the financial process leading to challenges in compliance and unmatched account balances. This is bringing more stress to the insurance carriers.

Can you give us a good example where financial accounting systems are struggling?

In co-insurance, we have multiple insurance carriers involved in underwriting a single risk, this is based on the percentage of risk allocated to each. In such scenarios, an insurance carrier will either be the lead or a participant.

If the insurance carrier is the lead, they will have to account for the cash flows from premiums and the corresponding risk for (1) their own allocation and (2) for the multiple participant allocations. This becomes increasingly complex as you have more participants each requiring multiple debit and credit entries within the books and records.

For large commercial & specialty insurance, the policy submissions come via an agent or broker. Agents and brokers work for commission; hence insurance carriers need to account for commissions in addition to premium. This is compounded by lack of standard commission structures, with each broker and agent having different structures based on policies submitted. This all adds complexity to the process.

When any claim occurs, the resultant financial accounting by the lead insurance carrier is extremely complex, involving the calculation and processing of cash payments between the policy holder, the lead and the participants. Looking simplistically, when receiving a claim, the lead insurance carrier will need to:

• Determine the pay out
• Determine the cash receivables from each participant
• Generate pending cash flow entries for payables and receivables
• Send cash instructions to the participants
• Reconcile the cash received from participants
• Process payment to policy holder.

Today, most of these activities are performed manually; resulting in accounting issues resulting in wrong calculations, re-work and delays in the settlement of premiums, commissions and claims. Many of these challenges are also faced by the participating insurance carriers.

Looking at the challenges faced by insurance carriers, can you explain how F3 would help address issues?

The F3 platform allows Insurance Carriers to match and reconcile individual expected premium receipts, and agreed outgoing claims payments, with incoming aggregated cash movements on the bank statement. It does this by loading the payable and receivable information from the core systems of record for policy and claims administration and storing them as smart transactions.

The platform then imports the standard formats for electronic bank statements and, utilising smart logic and the virtual counter party entities established during implementation, automatically matches individual transactions to the cash movement. The platform was designed to handle even the most complex scenarios, where Payables and Receivables appear on the bank statement as single sums that are an aggregated total of many underlying individual transactions, both debits and credits.

Even where a complete match cannot be made automatically, the platform can often identify sufficient common data points to propose a match that can then be presented to the admin team for manual reconciliation.

F3 has solutions in place for both traditional and ACORD e-accounting trading processes. In addition, F3 can create the outgoing payment files and automate the complete payment process subject to appropriate client approval processes.

What level of efficiency are you seeing F3 deliver? Can you give an example?

The inefficiencies in these processes are surprisingly large once the analysis is done to fully identify costs; working with one global insurer we were able to estimate that the cost to match and allocate a single transaction to a cash receipt on their bank account was £70.

Applying our technology significantly reduces this; the workload of the operations team is typically reduced by around 70%, whilst unallocated cash can drop by as much as 90%.

Transactions are automatically handled by the platform and processed at a fraction of the current cost – in the example earlier of our global insurer, this meant a cost of £70 for each transaction reducing to £5 for those automatically reconciled.

Why do you think solutions such as F3 will become increasingly important to insurance carriers?

As the current Covid-19 crisis has demonstrated, relying on domain expertise sitting in a few SME’s heads, managed by close working teams and spreadsheets is no longer fit for purpose. It is as equally important that an insurer develops a true digital mid and back office process as it is to create a digital front end for distribution

To close out, where do you see the industry going and how is Fennech helping to address challenges arising?

Like other mature industries the Insurance industry is threatened by technology and new entrant challenges. Incumbents can only ensure long term success by moving to a fully digitalised operating model to reduce costs, innovate products, and maintain and grow their existing customer base.

Conclusion: Boost Efficiency and Reduce Costs with Automated Insurance Accounting

Manual accounting processes hinder growth and profitability. F3 automates tasks, improves accuracy, and empowers insurers to focus on core business activities.