We need an insurance industry Big Bang across the back office

The UK insurance industry is on the verge of a Big Bang. Post-Brexit deregulation and digital transformation are reducing red tape and risks, while unblocking innovation and investment.

The government has pledged to significantly reduce the volume of insurance regulation and administration through reforms to Solvency II. Meanwhile, we are witnessing the digital transformation of front-office processes from digitalised customer touchpoints to automated, AI-powered underwriting.

Yet creating a leaner, smarter insurance industry depends on more than streamlining regulations and front-end processes – but also on a parallel revolution in the back office. Beneath the sleek, new customer-facing exterior of digital dashboards, apps and AI, many back-end operational processes, such as reconciliations, are still conducted using manual processes and Excel spreadsheets.

Few realise that this adds hidden costs to carriers by exposing insurers to compliance risks and diverting vital time and resources away from profit-making functions. It also prevents companies leveraging their reconciliations data to drive wider efficiencies and improvements to the bottom line. Deregulation can only reduce insurance industry risk and red tape if it is accompanied by digital modernisation across the back office.

Merger and acquisition activity

Despite a recent revolution in front-office functions, such as the use of AI and automation in underwriting, many insurers have failed to extend modernisation efforts to the middle and back office. For example, many firms use archaic manual processes and spreadsheets to conduct reconciliations of statements between brokers, insurers and additional parties.

To compound the issue, brokers use different formats for sharing data and different methods of calculating premiums or net amounts which must be combined into a consistent dataset. This is growing even more complex due to rising M&A activity across the insurance industry, leaving carriers managing a fragmented array of claims, cash, and policy systems that are inherited as a result of merging operations. However, M&A has been a key driver in delivering economies of scale, allowing businesses to achieve technology and regulatory solutions in a cost efficient manner.

This process is not only costly and time-consuming, but also vulnerable to human error, which therefore increases both operational costs and compliance risks. Crucially, there is a lack of governance, accountability and auditability around spreadsheet and paper-based financial records. This means that crucial oversights and compliance risks could be hidden in endlessly proliferating piles of paperwork.

These outdated processes divert resources away from value-adding functions. Calculation errors often conceal the true difference between what companies sell and receive, hampering efforts to improve the bottom line. As a result, 63% of participants at the LMForums’ Automation Practice Group recently highlighted back-office processes as the greatest opportunity for automation.

A back office Big Bang

Modernising front-office performance while neglecting the back office is the equivalent of updating a car with a shiny new exterior but neglecting to upgrade the engine that powers the car. As such, there is now a growing imperative to extend the digital revolution from frontline functions to the operations end of the business.

Automating manual reconciliations is one such area that can significantly reduce operational costs, eliminate errors and inconsistencies. This frees up valuable human resources for value-adding functions, boosting productivity and profitability. By enabling more accurate and granular reporting, new automation tools can also reduce compliance risks and bring greater trust and transparency to company accounts through more auditable data.

Significantly, automated systems can scale with business growth, seamlessly synchronise systems inherited from new mergers and acquisitions, and even incorporate new regulatory changes such as planned reforms to Solvency II and the FCA’s enhanced focus on client money processes, specifically CASS 5.

In addition, automation enables business to have a workflow functionality embedded in a solution to manage a process flow, automatically aligning all admin processes with company requirements – a useful tool for an increasingly remote workforce.

But the benefits extend to the front office too. Digitalisation and integration of reconciliations data creates an instantly accessible and actionable single source of truth, which can yield commercial insights such as opportunities for operational efficiencies or improvements to bottom-line performance. This enables more dynamic, data-driven business decisions.

In this way, digitalisation of middle and back-office processes not only reduces red tape and regulatory risks but helps businesses unlock the commercial value of their own data. The key to a new Big Bang across the insurance industry is to use this as an opportunity to digitalise and streamline operations across the entire business.

To find out more on how we can help insurance firms, visit our insurance solution page here.