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Streamlined and Efficient: A Close Process for Insurance Companies

Published September 2 2020
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Quarterly, insurance companies file financial statements with the National Association of Insurance Commissioners (NAIC) under Statutory Accounting Principles (SAP), which is commonly referred to as STAT. Additionally, Generally Accepted Accounting Principles (GAAP) financials are also commonly prepared, and, for those that are publicly traded, filed with the Securities and Exchange Commission (SEC). Since insurance companies need to close and report under two basis’ of accounting, insurance companies need an efficient and effective mechanism for capturing accounting differences is required. These serve to validate that results are accurate and balances roll forward.

The goal of this blog is to provide you with insight into the insurance close process through a solution that Alithya has created to drive efficiencies.

Understanding GAAP and STAT

Before we dive into the details, it is important to understand that two key factors define the differences between GAAP and STAT.

  1. GAAP is based on authoritative accounting principles and generally accepted practices for accounting and reporting for transactions and activities. SAP are accounting principles that facilitate an understanding of an insurance company’s solvency, or the ability to pay future claims.
  2. STAT reporting is for the operating insurance company, not the consolidated view of an organization. Except for specific annual reporting requirements, the NAIC requires the reporting of STAT financials for each domiciled insurance company. Since many insurance organizations operate multiple insurance companies, this means that multiple quarterly financial statements, disclosures, and schedules are prepared and filed with the NAIC.
    GAAP reporting is at the consolidated view of the financial statements and, commonly, includes multiple insurance and non-insurance companies. These differences are driven by the fact that GAAP is based on the “going concern” concept. The NAIC and state commissioners provide oversight that is focused on protecting policyholders and claimants of future benefits that may be paid at a point in time that could be several years out. As a result, SAP focuses on understanding the adequacy of the company’s statutory surplus to handle future claims and payments.

The above differences include both the accounting and reporting differences that impact the P&L, balance sheet, and equity/surplus.

The Close Timeline and Process

Unlike many other industries, within 40 to 45 days of the end of a quarter-end, both GAAP and STAT financial statements and disclosures are due to the governing bodies. While creating GAAP and STAT financials are required, the inefficiencies in the processes add effort and costs to organizations. Today, many insurance organizations rely on disparate systems, disconnected processes, and manual activities in their close cycle.

These include:

  • creating and maintaining an effective close calendar
  • assigning accountability to activities
  • managing chart of account maintenance
  • ensuring processes, sub-processes, and interfaces are run from various source systems and are error free
  • confirming prior period manual entries are reversed and current period manual entries are recorded in a timely manner
  • justifying intercompany eliminations that have been recorded and matched
  • validating controls are followed and accounts are reconciled
  • consolidating both pre- and post-tax results
  • finalizing financial statements and disclosures for both internal and external purposes

The manual processes and timeline are leading concerns for Chief Financial Officers and Controllers. Common concerns include:


Six Key Strategies for a Modern Close Experience

The following are six strategies of an effective and efficient insurance close cycle:

1. Incorporate a task manager to calendarize activities and deadlines that align with accountability.
Manual, Excel driven calendars do not provide the transparency that modern organizations need to track completeness, potential bottlenecks, and other hurdles. As you manage two accounting cycles, it’s important to understand what has been completed. Additionally, there is a sequential order of tasks to ensure the GAAP to STAT walk is completed effectively. Finally, when management questions when a task is to be completed or why there is a delay, it provides a factual representation of the close calendar and status.

2. Incorporate an organized collaboration platform.

A collaborative environment allows for an efficient engagement between team members as they validate results, review reports, and process bottlenecks. In addition to the review process, a collaboration platform also allows for auditable tracking of open and closed questions.

3. Accelerate the close process by automating processes and analysis.

Since the GAAP and STAT views of a company’s financial statements are distinct, before filing the quarterly reports, it is imperative that a reconciliation is performed, to bifurcate the differences. The reconciliation of GAAP to STAT, or vice-versa, can be an exceptionally challenging routine, involving a review of transactional detail, validating recorded entries, and adjusting entries. Automating this process to eliminate manual touch points allows for more value-added activities and reduces the risk of errors and omissions. By creating this level of transparency, cycle time and accuracy improve and audit inefficiencies are eliminated.

4. Standardize processes and automate routines

Standardizing the method of recording eliminations, reporting to the tax department, or reviewing the impact of foreign exchange, allows for a more effective review and reporting processes, creating a more effective audit. A seamless transition of tasks between members of the team is also created. Automation of routines and tasks allows team members to spend less time doing basic, time-consuming activities, and focus on more value-added activities, meaning happier and more productive team members.

5. Incorporate a systematic reconciliation process into the close.

I recently wrote another blog on this topic. Removing manual processes, standardizing reconciliations, creating a central repository, and automating reconciliation are critical methods to reduce cycle time and shorten the close cycle.

6. Integrate impactful reporting that provides insight into the process, helping to facilitate a more effective validation process, while also providing an efficient means for understanding the results.

Again, process efficiency. While reporting is often ignored as part of initial implementation, it’s a critical element that provides management with a quick view of results and gives the accounting team an effective way to manage tasks, such as confirming results and variances. I recently wrote a blog on a solution that Alithya has built to streamline the statutory reporting process.

Driving Change in the Close Process by Creating Efficiencies and Streamlining Processes

As mentioned earlier, the GAAP and STAT close processes pose several challenges. Given that they produce two distinct views of financial results, insurance organizations need a systematic approach to completing the accounting and reporting process in order to effectively meet deadlines while ensuring accurate and transparent results.

Questions to ask:

  • Do you have a manual calendar of close tasks that aligns to accountability?
  • Would you like to eliminate the manual processes of the financial close?
  • Do you have a systematic method for reconciling balances and reviewing the walk between GAAP and STAT?
  • Do you have effective reports that provide clarity into variance analysis and results?
  • Do you have disparate processes across your close cycle that should be standardized?

Alithya has a proven, comprehensive methodology to help our clients reap the benefits of their technology investments. Our technical and functional knowledge of the insurance industry helps provide clients with actionable ways to shorten the close cycle while gaining transparency into process and results, all while assuring scalability for the future.

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