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Is Your Process for Certifying Financial Statements Putting You at Risk?

Addressing regulatory requirements with end-to-end data integration can ease the pain of financial preparation while facilitating speed, accuracy and efficiency.
By: | October 4, 2017 • 5 min read

For insurance organizations with millions of transactions, closing the books is no easy feat. Quarterly, half-year and annual 10-K reports — along with other forms required by regulatory agencies — keep the accounting team taxed year-round.

Insurers’ financial statements, filed for every line of business, face external scrutiny from regulatory agencies in every state where they operate. Internally, there are shareholders, boards of directors and in-house audit and compliance teams analyzing the numbers.

There is great pressure to avoid mistakes, and no one feels that pressure quite like the CFO who signs off on the books. By attesting to their veracity, he or she assumes a great deal of personal liability. If the numbers don’t match up, the company can face fines for non-compliance and tarnish its image in the market.

“The pressure to get financial reporting right comes from all sides,” said Renata Sheyner, Senior Product Manager for Financial Control Solutions at Fiserv. “And while companies may only publicly disclose financial information a few times a year, they are continually reconciling transactions to prepare those reports.”

Manual reconciliation compounds compliance risks because insurers house huge stores of disparate data. Data can come from internal departments or third-parties, in the form of text files, spreadsheets or PDFs, it can involve multiple currencies, and it can refer to a payment, policyholder information, or claims history. Different sources and different structures of data make manual reconciliation cumbersome and error-prone.

Additionally, manual intervention can lead to manipulation of data and a lack of audit trail, making it impossible to identify discrepancies in data.

“It’s the combination of the volume and complexity of the data that creates risk,” Sheyner said.

Finance and accounting teams are being pushed to reduce costs and hasten the close cycle without sacrificing accuracy. But accelerating the process can also drive up the risk of error — unless an organization has the right tools in place.

A fully automated and integrated end-to-end reconciliation and certification solution can ease the pain of financial preparation while facilitating speed, accuracy and efficiency.

Reconciliation + Certification: The Power of Integration

Renata Sheyner, Senior Product Manager

Reconciliation and certification are normally two separate processes. Integrating them as a single process is a crucial move that can significantly improve accuracy and confidence in the data being attested/certified.

Gathering and prepping all the data, matching data to transactions, managing exceptions and providing proof calculations and summary reports constitutes the bulk of the work in the reconciliation process. Certification provides the final seal of approval.

Some vendors offer an automated solution for certification, addressing only the public signature aspect of the financial close process. With a certification-only solution, reconciliation is still done manually. Final numbers are entered into the certification system for review and final approval.

But certification is just the last step in a 10-step process. Without the back-end infrastructure to connect certification to reconciliation, it remains vulnerable to error. Once financial leaders sign off, there isn’t an easy way to backtrack and gain visibility into the data they approved. Insurance companies that manage millions of transactions per day need an automated system that tracks, matches and archives all the data, and connects that data processing directly to certification.

“Certification is just verifying that the columns match, but there’s no data to show cash flows over time and no view into what comprises your assets and liabilities. There’s no way to know what exceptions emerged or how they were rectified,” Sheyner said. “If your data is not integrated on the back end, how can the CFO know that what he or she is certifying is correct?”

Centralizing data in one place and integrating automated reconciliation and certification processes allows the data to be traced to its source throughout the entire financial close lifecycle — from data ingestion through matching, exception management, reconciliation, certification and signoff. It becomes trackable and transparent.

Additional Risk Mitigation Benefits

Integrating these processes can also mitigate risks inherent in the financial close process.

Automated reconciliation, for example, can reduce the operational risk from fraud and write-offs by identifying exceptions that require investigation, such as payments or policy information that need review.

“When you’re dealing with tens of millions of transactions in a day, it’s critical to focus resources on the exceptions that need attention,” Sheyner said. “The pieces of data that are clean and match evenly are not where you need to spend your time.”

Connecting the exception management process to certification allows auditors to access all the data that lead to the final numbers. It provides transparency with traceable and trackable data, and shows exactly how an organization adheres to internal compliance controls. This reduces regulatory risk of hefty fines and reputational damage in the marketplace.

“Reputational risks associated with restatement can be far-reaching,” Sheyner said.

Providing a view into the data matching and exception management steps of reconciliation also reduces the personal liability assumed by finance executives when they sign their names on the bottom line. “Now the executives can see for themselves that the data is accurate, comprehensive and complete,” Sheyner said.

The End-to-End Answer

Finance teams have been evolving to act as strategic partners in their organizations, helping to drive business results. They should be working with tools that can do some of the number-crunching for them, allowing them to focus on the tasks that provide the most value for the bottom line, like exception investigations and other strategic projects such as mergers and acquisitions and transformation initiatives.

In addition to freeing up time for those high-value tasks, end-to-end automation and integration can also save costs by reducing labor hours and saving resources like paper and ink.

But the biggest difference between a certification-only product and an integrated end-to-end reconciliation and certification solution is that integration provides transparency and risk control.

“Merging those two processes makes them simpler, more transparent and traceable, so the same data system is being used throughout the entire reconciliation and certification lifecycle,” Sheyner said. “Frontier™ Reconciliation from Fiserv is an end-to-end solution, starting with detailed data and tracking it all the way through to final certification.”

With an integrated solution like Frontier™ Reconciliation, insurers have the tools they need to address the high-stakes and cumbersome financial filing process while reaping the benefits of boosted efficiency and lower costs.

“Integrating all back-end processes and centralizing all data in one location provides true risk management,” Sheyner said.

To learn more, visit http://www.fiserv.com/FrontierForInsurance.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Fiserv. The editorial staff of Risk & Insurance had no role in its preparation.




Fiserv, Inc. enables clients worldwide to create and deliver financial services experiences that are in step with the way people live and work today. For more than 30 years, Fiserv has been a trusted leader in financial services technology, helping clients achieve best-in-class results by driving quality and innovation in payments, processing services, risk and compliance, customer and channel management, and insights and optimization.

Risk Report: Hospitality

Bridging the Protection Gap

When travelers stay home, hospitality companies recoup lost income through customized, data-defined policies.
By: | October 12, 2017 • 9 min read

In the wake of a hurricane, earthquake, pandemic, terror attack, or any event that causes carnage on a grand scale, affected areas usually are subject to a large “protection gap” – the difference between insured loss and total economic loss. Depending on the type of damage, the gap can be enormous, leaving companies and communities scrambling to obtain the funds needed for a quick recovery.

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RMS estimates that Hurricane Harvey’s rampage through Texas could cause as much as $90 billion in total economic damage. The modeling firm also stated that “[National Flood Insurance Program] penetration rates are as low as 20 percent in the Houston area, and thus most of the losses will be uninsured.”

In addition to uninsured losses from physical damage, many businesses in unaffected surrounding areas will suffer non-physical contingent business interruption losses. The hospitality industry is particularly susceptible to this exposure, and its losses often fall into the protection gap.

Natural catastrophes and other major events that compromise travelers’ safety have prolonged impacts on tourism and hospitality. Even if they suffer no physical damage, any hotel or resort will lose business as travelers avoid the area.

“The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry,” said Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh.

Christian Ryan
U.S. Hospitality and Gaming Practice Leader, Marsh

“People are going away from the devastation, not toward it,” said Evan Glassman, president and CEO, New Paradigm Underwriters.

Drops in revenue resulting from decreased occupancy and average daily room rate can sometimes be difficult to trace back to a major event when a hotel suffered no physical harm. Traditional business interruption policies require physical damage as a coverage condition. Even contingent business interruption coverages might only kick in if a hotel’s direct suppliers were taken offline by physical damage.

If everyone remains untouched and intact, though, it’s near impossible to demonstrate how much of a business downturn was caused by the hurricane three states away.

“Hospitality companies are concerned that their traditional insurance policies only cover business interruption resulting from physical damage,” said Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“These companies have large uninsured exposure from events which do not cause physical damage to their assets, yet result in reduced income.”

Power of Parametrics

Parametric insurance is designed specifically to bridge the protection gap and address historically uninsured or underinsured risks.

Parametric coverage is defined and triggered by the characteristics of an event, rather than characteristics of the loss. Triggers are custom-built based on an insured’s unique location and exposures, as well as their budget and risk tolerance.

“Triggers typically include a combination of the occurrence of a given event and a reduction in occupancy rates or RevPar for the specific hotel assets,” Nusslein said. Though sometimes the parameters of an event — like measures of storm intensity — are enough to trigger a payout on their own.

For hurricane coverage, for example, one policy trigger might be the designation of a Category 3-5 storm within a 100-mile radius of the location. Another trigger might be a 20 percent drop in RevPAR, or revenue per available room. If both parameters are met, a pre-determined payout amount would be administered. No investigations or claims adjustment necessary.

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The same type of coverage could apply in less severe situations where traditional insurance just doesn’t respond. Event or entertainment companies, for example, often operate at the whim of Mother Nature. While they may not be forced to cancel a production due to inclement weather, they will nevertheless take a hit to the bottom line if fewer patrons show up.

Christian Phillips, focus group leader for Beazley’s Weatherguard parametric products, said that as little as a quarter- to a half-inch of rain over a four- to five-hour period is enough to prevent people from coming to an event, or to leave early.

“That’s a persistent rainfall that will wear down people’s patience,” he said.

“A rule of thumb for parametric weather coverage, if you’re looking to protect loss of revenue when your event has not actually been cancelled, you will probably lose up to 20 to 30 percent of your revenue in bad weather. That depends on the client and the type of event, but that’s the standard we’ve realized from historical claims data.”

The industry is now drawing on data to establish these rules of thumb for more serious losses sustained by hospitality companies after major events.

“Until recently the insurance industry has not created products to address these non-physical damage business interruption exposures. The industry is now collaborating with big data companies to access data, which in turn, allows us to structure new products,” Nusslein said.

Data-Driven Triggers

Insurers source data from weather organizations that track temperature, rainfall, wind speeds and snowfall, among other perils, by the hour and sometimes by the minute. Parametric triggers are determined based on historical storm data, which indicates how likely a given location is to be hit.

“We try to get a minimum of 30 years of hourly data for those perils for a given location,” Phillips said.

“Global weather is changing, though, so we focus particularly on the last five to 10 years. From that we can build a policy that fits the exposure that we see in the data, and we use the data to price it correctly.”

New Paradigm Underwriters collects their own wind speed data via a network of anemometers that stretch from Corpus Christi, Texas, all the way to Massachusetts, and works with modeling firms like RMS to gather additional underwriting information.

The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry.– Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh

While severe weather is the most common event of concern, parametric cover can also apply to terrorism and pandemic risks.

“We offer a terror attack quote on every one of our event policies because everyone asks for it,” said Beazley’s Phillips.

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“We didn’t do it 10 years ago, but that’s the world we live in today.”

An attack could lead to civil unrest, fire or any number of things outside an insured’s control. It would likely disrupt travel over a wide geographic region.

“A terrorist event could cause wide area devastation and loss of attraction, which results in lost income for hospitality companies,” Nusslein said.

Disease outbreaks also dampen travel and tourism. Zika, which was most common in South America and the Caribbean, still prevented people from traveling to south Florida.

“Occupancy went down significantly in that region,” Marsh’s Ryan said.

“If there is a pandemic across the U.S., a parametric coverage would make sense. All travel within and inbound to the U.S. would go down, and parametric policies could protect hotel revenues in non-impacted areas. Official statements from the CDC such as evacuation orders or warnings could qualify as a trigger.”

Less data exists around terror attacks and pandemics than for weather, though hotels are taking steps to collect information around their exposure.

“It’s hard to quantify how an infectious disease outbreak will impact business, but we and clients are using big data to track travel patterns,” Ryan said.

Hospitality Metrics

Any data collected has to be verified, or “cleaned.”

“We only deal with entities that will clean the data so we know the historical data we’re getting is accurate,” Phillips said.

“There are mountains of data out there, but it’s unusable if it’s not clean.”

Parametric underwriters also tap into the insured’s historical data around occupancy and room rates to estimate the losses it may suffer from decreased revenue.

Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“The hospitality industry uses two key metrics to measure loss of business income. These include occupancy rate and revenue per available room, or RevPAR. These are the traditional measurements of business health,” Swiss Re’s Nusslein said.  RevPAR is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate.

“The hotel industry has been contributing its data on occupancy, RevPAR, room supply and demand, and historical data on geographical and seasonal trends to independent data aggregators for many years. It has done an exceptional job of aggregating business data to measure performance downturns from routine economic fluctuations and from major ‘Black Swan’ events, like the 9/11 terrorist attacks, the 2008 financial crisis or the 2009 SARS epidemic.”

Claims history can also provide an understanding of how much revenue a hotel or an event company has lost in the past due to any type of business interruption. Business performance metrics combined with claims data determine an appropriate payout amount.

Like coverage triggers, payouts from parametric policies are specifically defined and pre-determined based on data and statistical evidence.

This is the key benefit of parametric coverage: triggers are hit, payment is made. With minimal or no adjustment process, claims are paid quickly, enabling insureds to begin recovery immediately.

Applying Parametric Payments

For hotels with no physical damage, but significant drops in occupancy and revenue, funds from a parametric policy can help bridge the income gap until business picks up again, covering expenses related to regular maintenance, utilities and marketing.

Because payment is not tied to a specific type or level of loss, it can be applied wherever insureds need it, so long as it doesn’t advance them to a better financial position than they enjoyed prior to the loss.

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Parametric policies can be designed to fill in where an insured has not yet met their deductible on a separate traditional policy. Or it could function as excess coverage. Or it could cover exposures excluded by other policies, or for which there is no insurance option at all. Completely bespoke, parametric coverages are a function of each client’s individual exposures, risk tolerance and budget.

“Parametric insurance enables underwriting of risks that are outside tolerance levels from a traditional standpoint,” NPU’s Glassman said.

The non-physical business interruption risks faced by the hospitality industry match that description pretty closely.

“Hotels are a good fit for parametric insurance because they have a guaranteed loss from a business income standpoint when there is a major storm coming,” Glassman said.

While only a handful of carriers currently offer a form of parametric coverage, the abundance of available data and advancement in data collection and analytical tools will likely fuel its popularity.

Companies can maximize the benefits of parametric coverages by building them as supplements to traditional business interruption or event cancellation policies. Both New Paradigm Underwriters and Beazley either work with other property insurers or create hybrid products in-house to combine the best of both worlds and assemble a comprehensive risk transfer solution. &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]