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Planning in the Insurance Industry: Creating an Efficient, Holistic View of the Financial Statements

Published July 17 2020
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The purpose of this blog is to provide some insight into the planning process in the insurance industry and a solution that Alithya has created to help facilitate a more streamlined and efficient approach to integrated planning. For this blog, we are going to focus on the planning process for life, property & casualty, and reinsurance companies.

Planning in the Insurance Industry

As consumers or corporations, we know insurance as a means of protection against potential future financial losses due to various events that could or will occur. The role of insurance companies is to provide a risk management solution to the marketplace in exchange for premiums. Those risk management solutions can be in the form of short or long duration policies, which is dependent on the type of insurance coverage sold. The coverage and duration of the policies have an impact on how insurance organizations manage:

  • Cash
  • Investments assetsReserves for future potential losses and policy benefitsRisk tolerance levels

To generate operational gains in advance of future losses or beneficiary payments, insurance companies invest the premiums into income-generating investments, including:

  • Fixed maturities
  • Equities securities
  • Mortgages
  • Asset-backed investment vehicles
  • Real estate
  • Other strategic investments

Managing risk carries uncertainty and complexity with a myriad of potential scenarios that could unfold throughout a  plan horizon (i.e. one year, two year, three year, etc.). As a result, having the ability to react to changes and understand the relationship between the balance sheet, P&L and cash flow is critical, but can be highly complex, require a range of assumptions and difficult to maintain.

The Plan Cycle

The construction of the annual plan is often an onerous process for insurance companies that results in many iterations due to updates to assumptions, as well as various other levers that impact the company’s performance. The construction of the annual plan can be viewed as adding layers to a cake with each task dependent on the preceding task. Premiums are the base level of the plan and are the first objective before proceeding to the various other line items, including:

  • Reinsurance
  • Commissions
  • Deferred acquisition costs (DAC)
  • Premiums taxes
  • Losses and policy benefits
  • Claims expenses

Additionally, several elements of operating expenses and workforce modeling are dependent on the performance and expectations of underwriting results, including:

  • Premiums written to agent or underwriter
  • Calls received per call center seat
  • Claims per claims representative

Each of these line items have an impact on the balance sheet with various assumptions related to cash collected and payments made. As the P&L and balance sheet are planned, the operational cash flow is produced to understand liquidity, cash needs, and where excess cash may exist to invest for returns.

Similar to planning out the insurance line items of the P&L and balance sheet, the investment portion of the financial statements is a rigorous process that involves assumptions related to:

  • Interest rates
  • Equity market volatility
  • Principal and interest payments
  • Purchases, sales, prepayment speeds and maturities
  • Policy loans

Once investments are validated, taxes and dividend payments can be calculated to round out the financial statements. As mentioned, the process has dependencies that make it laborious, require repetitive steps and circular.

Challenges in the Planning Process

As can be seen, planning in the insurance industry has various challenges and considerations in the build-up of the annual plan. Historically, the role of the Financial Planning & Analysis (FP&A) team is to utilize historical data and apply broad assumptions to represent the future. In some cases, those assumptions are based on historical trends with some level of feedback from the business related to:

  • Anticipated changes in premium rates
  • The impact of a current year material loss event on future cash flows
  • Anticipated changes in credit quality of investments
  • Anticipated volatility in interest rates
  • Anticipated potential fluctuations in cash flows of investments

Additionally, at times, high-level investment or operational strategies are incorporated into the plan, such as:

  • A change in investment allocation strategy
  • A change in sales or channel distribution structure
  • A change in retention rates
  • Reduction in business written due to tolerance levels
  • New product offerings
  • Strategic investments

The approach typically lacks the full insight of the business, leads to a lack of control over management’s communication of corporate performance, and the plan is used for financial tracking, rather than a baseline for scenario modeling throughout the organization. As a result of the approach, other departments of the company (i.e. risk, strategy, treasury, etc.) create separate plans, commonly in Excel or other disconnect tools, to:

  • Measure performance
  • Evaluate risk tolerances
  • Evaluate concentrations
  • Create scenarios
  • Analyze liquidity
  • Analyze risk-based capital
  • Perform what-if analysis
  • Analyze the impact of material events

Modernizing the Planning Process

An integrated plan is a partnership between the business’ understanding of it’s potential, while also considering risks, such as volatility and market changes. This is then aligned to FP&A’s financial capabilities to interpret those factors and drivers and incorporate them into a financial plan. The approach marries operational goals and objectives with leading drivers that produce results that can be accepted by the business and allows for a baseline for analysis throughout the organization.

This allows for a more effective approach that leads to a collaborative and efficient planning model. Additionally, it leads to standardization, a reduction in maintenance of multiple models, the elimination of manual processes, and a reduction in reconciliations between various plans for varying purposes.

A best in class planning process should eliminate manual processes and incorporate:

  • Collaboration between the business and finance teams
  • A level of planning grain that supports decisions
  • The ability to seed results
  • Constant currency analysis
  • The ability for self-service analysis
  • Flexibility and scalability for changes in business needs and drivers
  • Visibility into real-time results
  • The ability to create “on the fly” changes and versatility for various scenarios
  • Flexible, standardized reporting to analyze results and impact of changes in assumptions

The annual plan needs to be adaptable and managed in a way that allows for swift analysis of various drivers that impact performance. While the factors will change based on the segment of the industry, those factors include changes in:

  • Policy lapses
  • Policies renewal
  • New business written
  • Policy volume
  • Premium pricing
  • Retention
  • Morbidity & mortality rates
  • Commission rates
  • Loss or beneficiary factors, such as severity
  • External claims expense rates
  • Equity market volatility
  • Interest rate volatility
  • Foreign exchange rates

There are various view of reporting, but, ultimately, reporting should provide insight and perspective to the financial statements, while also providing analytics and validation statistics via Key Performance Indicators (KPIs) including:

  • Premiums:
    • Policy lapse ratio
    • Renewal ratio
    • Sales to new business written
    • Average policy
    • Quota vs production
    • Strike ratio
    • Average policy size
  • Reinsurance:
    • Retention ratio
    • Cession ratio
  • Commissions:
    • Rate to premiums written
    • DAC to earned premiums
  • Losses:
    • # of claims
    • Average cost per claim
    • Severity
  • Average claims expense per claim
  • Combined ratio
  • Investments:
    • Return on investments
    • Investment expenses to gross investment income

Our solution offers:

  • A process that incorporates a robust view of financial performance.
  • A collaborative environment that allows for self-service review and engagement with results.
  • Real-time results of the impact of changes in drivers and assumptions.
  • KPIs that inform decision support.
  • Comprehensive reporting that allows for various views of financial and statistical data.
  • Dashboards to allow for a view into progress in the plan process, as well as to provide executives with a pictorial view of performance.
  • What-if modeling capabilities to allow for swift analysis of changes in drivers and assumptions.
  • Multiple versions to compare plans and forecasts against actuals.
  • A secure environment to ensure that access is provided to the responsible individuals.


Having a comprehensive planning process affords insurance companies the visibility into factors that impact performance across all financial statements to make key decisions efficiently. This blog should have provided some insight into how Alithya can help to produce an efficient and integrated planning process to produce a full financial picture for insurance companies. Our solution provides organizations with the ability to analyze results and provide decision support efficiently, while also allowing organizations to adapt as changes occur. In the coming weeks, we will have a webinar to provide additional insight into this solution and how we are helping insurance companies produce an efficient, holistic view of financials results.

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