The role of a CFO has clearly evolved over time. During the Global Financial Crisis (GFC) and the prolonged low interest rate environment, the CFO’s role when it came to financial stewardship was profound, said Ms Dora Wong, CFO, Asia Pacific, QBE Insurance.
CFO as a strategic partner
“Today, the role of CFOs has also expanded to be more of a strategic partner and adviser to the CEO and the rest of the leadership team. We also see the need for more collaboration across finance, risk and actuarial functions when making decisions,” said Ms Wong.
“That’s the number one challenge for an insurance CFO today – to become a true partner and adviser to the business teams,” she said.
Simply put, a CFO needs to help the business teams understand the values that the finance function can bring to them in terms of business growth and risk management. This can be accomplished through insightful analysis of business performance, having a great understanding of both the market and industry trends plus solid forecasting capabilities to provide senior management with any early warning signs.
Mr Ken Rappold, CFO, Aviva Asia, concurred. The responsibilities of the CFO continue to expand with the role becoming ever more integrated into most facets of a business’ operations. “CFOs are finding themselves included in most meetings and task forces, either as decision makers, strategic advisers or financial consultants.”
“You are expected to provide innovative commercial ideas, articulate the company’s investor thesis, protect the company’s assets, ensure delivery on current targets and forecast future results and strategies, among other responsibilities,” he said.
This is particularly so for a young company. As Ms Cathy Chen, CFO, Peak Re, said, a CFO today needs to work very closely with the CEO and execute the business plan to meet both short term and long term targets.
“As a young company, we need to grow and generate profit at the same time and this is not something one should rely solely on the CEO for. With the support of actual figures and data, the CFO and finance team will actively drive the business planning, and give an independent and holistic view on how the capital should be allocated from top-down.”
Excellent communicator
So to perform the role of a CFO today, other than broad and deep commercial knowledge of the business, which is increasingly important, it must be supplemented by excellent communication and relationship-building skills, said Mr Rappold.
Excellent communication and relationship-building skills are important in performing the role of strategic partner and adviser, and as Mr Tony Cheong, Group CFO, Great Eastern Holdings, said: “CFOs have to be adept in explaining the potential volatility in earnings and capital to their boards and investors, given the volatility in investment markets and its impact on earnings and capital management.”
In addition, Ms Chen said the reinsurance industry has been given a “negative” outlook in credit rating. “With this negative outlook, individual company needs greater effort to persuade the agencies for a rating upgrade despite the good business performance that an individual company enjoys.”
A CFO should keep constant dialogues with rating agencies to help them better understand how the company has been doing from the financial point of view. “For a young company like Peak Re, more frequent and transparent communication is needed to help rating agencies better understand the firm’s business performance and build their confidence in us,” she added.
Coping with regulatory pressures
Following the GFC, there has been an increasing spate of regulations in the financial services sector, said Mr Cheong. (See table below.)
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Wish list on regulations
As regulatory pressure intensifies, the CFOs share with us their regulatory wish list.
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Understanding insurers and distributors
“Going forward, insurance will play an even greater role in supporting the socioeconomic objectives of Asian governments and regulators. Achieving these goals will certainly depend upon protecting customer interests. However, it will also be important to provide support to insurers and distributors to ensure a healthy and stable industry.
Despite an increasing level of direct-to-consumer sales, both face-to-face and telemarketing distribution channels play a vital role today, and in the foreseeable future, in increasing customer penetration and density. Regulators’ understanding of, and empathy with, distributors and how they work will be key to the successful promotion of insurance coverage across the region.”
Mr Ken Rappold
CFO, Aviva Asia
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Staggering implementation
“The implementation of new regulations such as IFRS 4, IFRS 9, RBC2 and IAIS’ risk-based global Insurance Capital Standard in the near term is coalescing upon insurance companies. Although this provides insurers with a clearer visibility of the future insurance landscape, staggering the implementation over a broader timeline would provide greater ease in the adaptation of these regulations.”
Mr Tony Cheong
Group CFO, Great Eastern Holdings
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A “passport” system
“As a global reinsurer, Peak Re has expanded its business into a wide geographical reach. During the process, we have had to comply with local regulatory requirements. While we appreciate the different requirements fitting into different jurisdictions, we believe that it will be beneficial to market players if regulators or authorities can come up with a common standard or qualification acknowledgement system.
Similar to a “passport” system, authorities can agree on a common set of high standard regulations, and once a reinsurer successfully applies for this “passport”, it can be exempted from meeting the treaty country/market’s local requirements. This can ensure a high level of service standard is met while simplifying the need to go through similar regulatory motions in each market. A good set of regulations is not about setting the requirements tight, but rather helping the industry to achieve a high level of professionalism with better efficiency. Hence, with a good framework in place, the authorities will not need to monitor too much on the details.”
Ms Cathy Chen
CFO, Peak Re
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Deeper economic integration
“It would be for deeper economic integration across the Asia Pacific region, which in turn would support business development, help capital management and lower compliance costs.
Ideally, such economic integration would include investment liberalisation, which would make it easier to set up businesses organically or through M&A activities. It would also include extensive bilateral agreements to avoid double taxation. And it would include regulations that support the free flow of capital across the region. Finally, such economic integration would result in the free flow of services, providing increased efficiency in product development and increased consistency in customer experiences.
Another wish would be the convergence of accounting standards which provides better transparency and comparability of financial results for stakeholders. Such would also improve efficiency and scalability in financial
reporting.”
Ms Dora Wong
CFO, Asia Pacific, QBE Insurance
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To cope with the increasingly demanding regulatory environment, the risk management and compliance team at Great Eastern has grown 2.5 times in headcount since 2009 and related costs have increased more than 3 times.
“We have also invested close to S$10 million (US$7.58 million) into systems and processes over the last six years and these investments will continue to grow. For CFOs of insurance companies, one complexity lies in anticipating, monitoring and managing the impact of escalating compliance costs as the regulatory environment changes,” he said.
Increasing returns
One of the top challenges for CFOs continues to be the low interest rate environment. Mr Rappold said: “Low interest rates present real world challenges for insurers, as we seek to provide competitive savings and retirement products to our customers, and as demand for such products continues to increase in line with the well documented shift in wealth and demographics in many Asian countries.”
On a separate note, he also highlighted tackling the opportunities and challenges presented by the evolving “digital” world as one to watch. “I believe that digital will have a most profound effect on the industry in the future, with innovations ranging from telematics, to mobile sales, data analytics, crowdfunding, customer experiences, and more. The impact of digital will reach all corners of the insurance industry in one way or another in a significant way,” he said.
Increasing the rate of return on equity is another challenge cited by Ms Chen. “The reinsurance industry is in a soft market cycle and it is not easy to achieve excellent ROE. From shareholders’ point of view, there is an opportunity cost between investing the capital into reinsurance and into other investment options.”
Against the backdrop of a rapidly changing operating environment, the role of a CFO is essentially to advise the board on the best option to choose from, taking into consideration costs and benefits, said Mr Cheong.
“In this regard, I do not think my role has markedly change in the last two to three years,” he added .
Right model, right people
Capital, cash flows, financial compliance and managing earning volatilities all remain priorities for the CFO today, said Ms Wong. The big challenge is to optimise the finance operating model in order to improve efficiency and controls, and also increase timeliness in terms of delivering financial performance reports and the related analysis.
This is particularly vital for a CFO of an Asia Pacific operation. “As we all know, Asia is diverse in geography and also accounting, capital and regulatory standards. Many companies face legacy issues due to differences in front-end or back-office platforms stretching across borders and across the operating entities. It takes a considerable amount of time and investment in standardising such processes,” she said.
“To successfully deliver the value-added proposition of the finance function, the right people have to be in place – people with an open-minded attitude to revamp the existing processes. Obviously, we also need a commitment from senior management to support the finance vision. Too often in some companies, finance competes for resources against other business priorities, such as rapid growth or regulatory compliance,” she added.