On the back of recent research by Post and Banking Circle – the financial utility – into the banking/payments infrastructure insurance companies use for reconciliation and settlement, Edward Murray sought to discover the most pressing pain points and how they can be overcome
Despite the available technology to help businesses across the insurance sector manage liquidity and cash flow, many continue to rely on outdated, manually intensive collection and reconciliation systems.
Indeed recent research by Post and Banking Circle found that only 4% of firms had wholly automated this (see figure one), despite over half (55%) recognising that keeping on top of the latest technology poses one of the biggest threats to their business (see figure two).
Manual systems are often inefficient and make it impossible to address errors in real time, operate efficiently and maximise the value of a company’s treasury function.
Referring back to the Post and Banking Circle research, payment failures and delays were among the biggest pain points suffered by respondents (see figure three).
General insurers tend to price and sell annual policies that are renewable yearly. But for retail customers, paying in monthly instalments makes premiums more affordable and this has become the market standard.
To enable these monthly payments, credit providers make a loan to policyholders that covers the annual premium. They then charge interest on that loan and collect the payments monthly.
While policyholders pay monthly, credit houses, brokers, intermediaries and insurers, must reconcile the associated flow of payments. Few have managed to implement fully automated systems that can do this in real time and with complete accuracy.
Red Apple Group comprises several different companies including a master broker, providing policies to other brokers for their own clients. It relied on credit houses but found the model too inefficient to be workable.
Kevin Paterson, managing director at Red Apple Group says the company would upload data in spreadsheets overnight, which the credit provider would then download.
He comments: “If the bank details were incorrect it would take them a week to notify us. They would have to log onto the system, send it to the bank, the bank responded, and five or six days went past. They would then say the details were wrong, asking us to check with the customer and by then the whole thing had moved on.”
Whether direct debit details have been omitted, account numbers are incorrect or personal details do not match up, the end result is delay and inefficiency.
Penny Searles, chief executive officer at Smart Driver Insurance, also believes things could be more efficient and that the current system makes it difficult to deliver excellent customer experiences and deal with problems before they escalate into serious issues.
She says: “I had a case where the customer had not wanted to renew. The instruction between us and the credit house got lost. The customer phoned us on the first of the month saying £150 had just come out of their account. We apologised and said we would get it refunded, but that took until the eighth of the month because the credit house waits for the payment to clear properly before the refund is issued.”
Smart Driver Insurance had to pay compensation to the customer and was also left in the position of covering the banking charges incurred because the customer had gone overdrawn in paying for the insurance they had cancelled as well as the new policy they had taken out elsewhere.
Searles also says there are complexities to deal with when a customer cancels or misses their payments to the credit house.
If Smart Driver Insurance is not alerted quickly to the stopped payments it cannot tell the insurer to take the client off risk. This means there can be an overhang and the client has remained insured without paying for the cover. In this scenario, Searles says her company can very quickly find itself out of pocket.
She adds: “If the customer cancels on the first of the month and the credit house do not get to it for a couple of weeks then we can end up with the customer owing us money and we have to try and collect that. It is a moving feast every day and there are teams of people constantly looking at debts and chasing them as required to avoid situations developing.”
Paterson says that Red Apple Group were so disillusioned with the model that it built its own proprietary system.
Discussing improved functionality, he says: “We can, at the point of sale, integrate with Lexis Nexis, Call Credit, Experian and we do address look up, bank validation, affordability and credit checks at the outset. We can tell the broker if any of the information is incorrect and so we stop issues trundling on. The technology exists to do it and we have 65,000 small policy loans running.”
The Post/Banking Circle research found that only 19% of respondents described their premium collection excellent; and 40% described on boarding new partners as poor (see figure four).
Findings that highlight that insurers are also struggling to switch to efficient collection and reconciliation systems. A fact that restricts their ability to get a fast and accurate oversight of their liquidity and cash flow, according to Jon Mitchell, owner at Beachside Consulting and a former operations director at Axa Insurance.
He comments: “If you look at some of the big composites, they are probably offshoring quite a bit of their credit control and reconciliation processes. Certainly, in my time at a big French insurer, a lot of that stuff was done offshore. The driver really was a total lack of consolidation of their back-office systems and for any one broker, they might in the background be trading on four, five or six different platforms.”
As a result, even pulling together a coherent broking statement takes significant effort.
Whether it is brokers, insurers or credit houses, there are numerous players in the insurance market seeking to reconcile multiple payments, form numerous sources, and match them all within pooled accounts. The Post and Banking Circle survey found only 43% had a matching rate of over 90% (see figure five).
One possible solution beginning to find some traction in the market is the use of virtual IBAN accounts. Instead of monies being collected into and paid out of pooled master accounts, individual clients have their own account to handle their payments.
Tom Longhurst, sales director at Banking Circle, explains: “It is very easy for payment references to be incomplete or details to be wrong and for it to become incredibly complex to match things. Why bother to have these pooled accounts? It is possible to have a single account for each person/client.”
He continues: “You essentially create a full reconciliation engine. The client pays into their dedicated account and whatever monies have to be passed on from that account to a third party, can then be paid directly from there. The virtual accounts all sit under a master account. Anyone can pay into these individual accounts, and the reconciliation against the client can be matched easily.”
Quick reconciliation of payments and a single view of a customer were ranked as the two most important factors for firms in the Post and Banking Circle research (see figure six). And there are significant benefits on offer to those who can improve their collection and reconciliation systems. Companies like Red Apple Group have already taken the plunge for themselves and now offer their solution through a standalone business – Red Apple Finance.
Others may decide it is time to explore some of the new options on offer. As Mitchell concludes: “With this virtual IBAN approach it sounds like the sort of thing that would be quite easy to trial with half a dozen accounts and to see how you go. If I was in one or two of my ex-jobs it would be a conversation I would be up for.”