Just as the banking sector is changing in the digital age, so too is the insurance industry, which is no longer lagging behind in the journey into digital services. An insurer’s finance function not only carries the burdens of regulatory change and intense competitive pressure, but also acts as the gatekeeper to successful digital innovation. Mark Hesketh of Standard Life describes to us how the industry and his finance team are meeting these challenges.
It is an exciting time in the insurance industry as it follows the trail of the banking sector into an era of digital services. When we asked Mark Hesketh, finance director UK and Europe at Standard Life, about the fundamental changes to the business in which he is playing a key role, at the top of his agenda is something more mundane - the regulatory compliance requirements that demand the attention of any financial services institution.
Solvency II, the EU directive that harmonises the EU insurance regulation and addresses the amount of capital that insurance companies must hold to reduce the risk of insolvency, has been a long time coming and Hesketh is glad to see it coming to an end, though his company's performance in meeting its requirements is symptomatic of the success of its technological approach to redefining its business model.
"I arrived at Standard Life in 2011 and back then my first meeting was about Solvency II and we are now nearing the end of that journey. We have been running our model for two years and the quantitative reporting template (QRT)feedback was completed in June, so we're well placed," he says. "We are a financially cautious company, so did not need big reinsurance deals to get in shape for Solvency II,"
Hesketh's role covers the whole of Standard Life across the UK, Germany and Ireland, and has a wide range of FD responsibilities including the implementation of a new general ledger system in 2015.
The changes the company has made in its reporting process have garnered many accolades because of the great increase in the speed of its filing with the Prudential Regulation Authority (PRA). It has been able to submit significantly more data for regulatory reporting in quicker time scales. Now, Hesketh can start to devote more time to preparing the organisation for a different future by continuing to adapt to the evolution of the industry and becoming a more fee-driven business.
"There are different camps within the industry, but we set out our financial strategy five or six years ago - to optimise our balance sheet while increasing revenue from our products. It is about digital-intensive products and increasing fee business, and we are making a big investment in customer enrolment," Hesketh adds.
"We have invested in technology in many areas, in part to create a scalable online journey for our customers. Employers can go online and set up a pension scheme in six minutes. We also invested in technology for the finance function, which is why we are able to deliver our regulatory reporting in line with the pace requirements.
Embrace the future
In terms of its digital journey, the insurance industry has taken the scenic route but Hesketh sees Standard Life as benefitting from a long-term strategy rather than a knee-jerk reaction to changes in the competitive landscape. It has carefully considered changes in the regulatory landscape, and the fundamentals of the long-term savings and investment business when defining its digital strategy, and that approach is now paying off.
"I think it's fair to say our sector has been slower to embrace digital than banks have been. The drivers are different, but we recognise that a combination of social change and regulatory change, particularly in the UK, have driven different customer needs and requirements - and we have been planning ahead for the opportunities this creates," Hesketh says.
"In October 2012, our industry went through a big change as auto-enrolment into workplace pension schemes started to be rolled out. This means that all employers will need to offer their employees access to a pension scheme. We invested in technology to build solutions that were scaleable, and made it as easy as possible for employers and their employees.
"In 2013, our industry implemented the recommendations of the Retail Distribution Review, meaning that financial product providers could no longer pay commission to intermediaries. Standard Life had already stopped paying commission for new business in 2006, so was well placed for this regulatory change and able to focus on investing in our award winning Wrap platform to support advisers and their clients.
"RDR has also meant there are now fewer financial advisers in the UK, which has created a significant advice gap. At the same time, we have seen further regulatory change, not least the Pension Freedoms introduced this year, allowing people to access their pension savings earlier, from age 55, and providing more options when they come to retire. With more choice comes a greater need for guidance and support. We are well positioned to support this new flexibility, and again were able to focus on creating an online journey to support people wanting to make the most of the 'Pension Freedoms'. More than 6,000 people have already gone online to complete transactions through this new journey.
Hesketh wants to see Standard Life emulating the most popular brands - such as Apple, Google and Facebook - which respond fast to new opportunities in the digital space. He admits that the insurance sector as a whole has been behind the curve but he feels that Standard Life has invested wisely to move beyond a largely paper-based way of doing business.
"It used to take two years for actuaries to build a product and another two years to implement it. The digital world moves quickly so we now work on the MVP - minimum viable proposition. That is the minimal journey to bring a product to market, test it and get feedback. It is like booking flights or hotels - that is done online now - and financial services is becoming similar. We use agile teams to review and then improve customer experience, and because we are easy to do business with we retain more loyal customers, which is cheaper than winning new ones," says Hesketh.
"We monitor brand awareness, and our customers' willingness to recommend our products and services to others through our Net Promoter Score, and we respond to whatever changes there are in those indicators. We are agile. We do it live now. We also talk about the chief marketing officer (CMO) and CFO getting married. I work very closely with the CMO, so new investments and new products are tied together."
The CFO's role in this is to make sure the company invests in the right innovations for the long term, eschewing the appeal of sexy new technologies to ensure those that offer measurable benefit to the company and its customers.
A finance function fit for the future
Hesketh has seen Standard Life invest in many new technologies and believes the company will continue this successful strategy and explore the potential of, for instance, cloud-based financials and process automation.
"We have worked from the front end back and we have implemented new technology that has enabled us to improve the speed of our reporting. We have reduced our ledger codes by a factor of five and we have only 20,000 ledger accounts, which is still a lot but is 11 times less than we used to have. So, we have more time for analysis, which we can also do quicker," Hesketh says.
"We have made a lot of progress but we are not finished yet. High-performance computing has been installed. For 20 days every year, we need a lot of technology, so now we are looking at ways to use someone else's technology rather than owning it ourselves. It is not our core business to own the boxes, so we may look at cloud-based solutions. As CFO, I may be 'married' to the CMO, but I am also married to the IT director. Finance used to be a good custodian of data, but not a generator of insight. Now, we can automate the scorekeeping and change the culture and model of finance to one of insight and analysis. The lines between IT, marketing and finance are blurring as they overlap more."
Innovation, however, will not only come about through technology. Just as important are the people that come into the finance function.
"In finance, we recruit more for attitude than for qualification. You need great people who bowl people over with their ethos and thinking on customer service," Hesketh adds.
A revitalised finance function needs a new breed of finance director, and Hesketh is a good example. His career is much more varied than the 14 years spent at RBS, and encompasses a variety of roles and industry sectors. His rounded perspective perhaps lies behind his recognition as 'Inspirational FD of the Year' at the FDs' Excellence Awards 2014.
"Early on, I worked in a sausage factory where we had to close the window to stop the fat from the production line getting into the office. I moved to the retail sector and then into industrial services before entering the financial services industry. I worked at Unilever, at Sears and at GKN before joining RBS. That kind of career path gives you a broader perspective. Financial services is very different because what you sell is not tangible but you still need to understand what makes a good team and how succession planning must work.
"It is impossible to see from the inside what it takes to be an inspirational finance director. In some ways, it was mortifying. Lots of people here at Standard Life are inspirational. Being a good leader is all about being part of the team. We collaborate and work together," he says.
At a time when the face of the finance function is rapidly changing, Hesketh's advice to people pursuing a path to the top in finance is to be bold.
"Seek forgiveness, not permission. Here at Standard Life we have automated a lot of processes and we have built a business partnering function. FDs can't be inward looking. They can't just keep score. That kind of thinking went out of the window a long time ago. You can't just count the loss, you have to do something about it," he explains.
"If you think something is important, then do it. That is the culture here. To make a difference you have to do something. That kind of philosophy helps the organisation because it improves employee satisfaction and makes it easier to recruit the right people. There is lower turnover of employees as a result. It is part of what makes me an advocate of the brand, and I have every Standard Life product you can have. Our mindset gets teams interested in the business at every level. It gets them talking and feeling about it positively, and that culture is very important."