With the 10th Asia Insurance CFO Summit set to take place in Bangkok this month, we speak to four industry CFOs on the importance of collaborating with stakeholders, developing strategic insights, and managing the transformation of the finance function.
CFOs continue to play an important role advancing their organisations’ growth and competitiveness while at the same time remaining compliant with rules and regulations.
At the height of the financial crisis, global economic weakness meant that many CFOs delivered great value through belt-tightening measures to protect underlying profitability and allow organisations to safely navigate choppy waters. But as the green shoots of recovery appeared, the role of the CFO to drive business expansion became even more pronounced than in the past.
However, the scale seems to be tilting towards the side of prudence once again, although CFOs continue to have one eye on growth opportunities.
Timely detection of risk
In such an environment, risk management becomes ever more important for an insurance CFO as the company pursues growth.
“Under the current market environment where future outlook is quite uncertain, my guiding principles are the timely detection of risk and having effective measures to mitigate them, so that I can come up with a growth strategy with a sufficient understanding of the risks,” said Mr Kichiichiro Yamamoto, Chief Financial Officer for Tokio Marine Asia.
Holistic understanding of risk and capital management
Coupled with the increasing focus on enterprise risk management, Mr Yamamoto added the role of finance in risk management and overall governance is increasing significantly.
“The importance of knowledge and skills proprietary to finance remains unchanged, but in addition, I encourage finance people in the managerial ranks to have a holistic understanding of risk and capital management and other internal control frameworks.”
In order to do all of these, he cited “access to high quality market intelligence” as a key enabling factor for finance executives.
Another enabling factor in managing risk is the importance of the finance team to coordinate with other stakeholders to form a more complete picture.
“The key is to nurture the culture to have them work collaboratively with other departments and prevent them from just working in their own silos,” said Mr Yamamoto on the vital skillsets necessary for a dynamic finance team.
CFOs as growth drivers
Connecting effectively with others
The ability to communicate and collaborate with others is a key attribute cited by the CFOs Asia Insurance Review spoke to.
In highlighting the importance of working with various stakeholders, Ms Cathy Chen, Chief Financial Officer, Peak Re, said: “A CFO needs to have a profound understanding of the business, get to know the clients, business partners and even competitors. He or she needs to work with various teams from the business side to fully utilise the resources available.”
Sydney-based CFO for AIG’s Commercial business in Asia, Mr Stuart Farquharson, has responsibility for 10 markets in the Asia Pacific and given his “varied role”, said the need to partner effectively with others in the business chain is vital.
“Take commercial property construction for example, we look at the financial risks associated with insuring a major construction project, while taking into consideration our risk mitigation initiatives such as supplying wearable technology that can identify when a worker carries too much weight, lifts incorrectly, enters an environmentally risky area or gets too close to dangerous equipment.”
“Research is also a critical tool for understanding where threats and opportunities lie for any industry, so we need to work closely with the R&D team to understand how we can provide solutions for evolving needs,” he said.
Indeed, analysis carried out by Accenture revealed that by 2020, 80% of traditional finance services will be delivered by cross-functional integrated teams.
While finance teams increasingly utilise technology to automate repetitive and labour-intensive finance operations – necessary to help free some of them up to focus on the more strategic functions – CFOs cannot afford to be too dependent on automated systems to fulfil their role.
“We can build systems to capture and analyse information but there is so much information that is not captured in such systems; good old fashioned verbal communication is an excellent bridge for this gap. Sitting in the backroom running spreadsheets is not enough,” said Mr Ping Lam, Finance Director Asia, Aon Risk Solutions.
More so than in the good years, CFOs require foresight and prescience in order to navigate through the tough conditions.
“This year will certainly be the most challenging year that we have had in a few years in Asia. We have tracked double-digit growth since the start of the decade; however my focus for 2016 will be slightly different from the preceding five years,” said Mr Lam.
Adding to the theme of “good market intelligence” mentioned earlier, Mr Lam, on the other hand, touched on the importance of having “informed foresight” to balance risk and returns in an uncertain economic climate.
“We need to truly understand our revenue momentum and pipeline, and then match our rate of investment at an appropriate level,” he said.
“While we will be constrained around how much we have as funds for investment, we are not talking about not investing but rather how and where to invest what we have.”
Transformation of finance function
So how can CFOs achieve clear foresight to drive the company forward when they are encumbered with varied roles and tasks?
The key is to separate the more traditional roles of finance from the more value-added functions. Many CFOs are increasingly devoting lesser time on basic transaction processing and “business as usual” financial reporting tasks, and contributing more towards strategic business performance and risk management activities.
At Aon, the company has already undertaken the transformation of the finance team by splitting the controller function (typically compliance and technical activities) and the business finance function (typically financial planning and analysis), said Mr Lam.
“Such segregation allows us to drive more sophistication and specialisation in our quest for optimal decision making across the whole gamut of CFO activities. For the business finance function, this has allowed us to enhance our ability to support the business through forward visibility and to drive appropriate investments and specific results,” he said.
Hence, it is imperative that finance teams consist of people with diverse skillsets – who have the right combination of technical skills and business knowledge, said Mr Farquharson.
Having dual skillsets would also need to be complemented with a dual mindset, he added.
“Creating a high performing finance team also means bringing a certain mindset to the function. This involves maintaining the integrity of the underlying control environment and operating structure while being commercially focused and partnering with the business.”
CFOs are indeed having to oversee a sea change as the finance role evolves, and a disciplined approach to change management is necessary to forge a finance function that is able to effectively undertake a broad business partner role.
Key risks on the radar
When assessing key risks on the radar, Ms Chen said managing regulatory changes is a priority for reinsurers as they operate across the globe.
“Peak Re is an Asia Pacific-based global reinsurer, therefore, the implementation of Solvency II in Europe, C-ROSS in China, and RBC framework in Hong Kong, will all impact us financially. So how we allocate our capital smartly and efficiently to generate sustainable and profitable business will be a challenge,” she said.
Low interest rates
Low interest rates continue to be a bane for insurers, and Mr Yamamoto believes it remains a key risk that will influence the strategies of insurers.
“The impact on life insurance is by far larger than that on P&C insurance, and would make many life products unsustainable. This will trigger the needs to shift the product mix and the distribution model. On the P&C side, it should increase the importance of designing pricing and product development strategy from the standpoint of constantly generating healthy underwriting profit,” he said.
Mr Farquharson, on the other hand, spoke about security risks, in relation to the safety of its employees and clients.
“As an international organisation, our employees are constantly travelling to all parts of the world which poses a number of safety threats, including terrorism events, political unrest, theft and pandemics just to name a few,” he said, while also citing cyber security as another area of focus for AIG.
Where Mr Lam is concerned, the key challenge lies in the delicate calculation of being prudent while at the same time pursuing growth – thereby encompassing the balancing role which CFOs have to manage.
“While managing this year is the most immediate concern, we need to feed the machine in terms of making sure we have the right people, technology and infrastructure to be able to grow next year and thereafter. There is plenty of talent out there and we have many new ideas – the last thing we want to do is to put ourselves in a straitjacket with regard to future growth,” he said.