Feature Story

All insurers are subject to statutory accounting practices (SAP) and report on NAIC-based statements that detail their assets, liabilities, income, and expenses, filing these statements with each of the states in which they do business. Publicly traded stock companies have an additional set of Securities and Exchange Commission (SEC) reporting requirements, based on generally accepted accounting principles (GAAP) rather than SAP.

Even though mutuals and privately held carriers arent subject to SEC reporting, most undertake a GAAP analysis anywayeven to the point of having GAAP statements audited. Id be hard pressed to think of [mutual] companies that arent producing GAAP [statements], says Paul L. Horgan, partner and leader of the insurance advisory practice at PricewaterhouseCoopers. And while some niche financial reporting software packages handle only statutory reporting, most handle GAAP, too.

Mutuals frequently undertake GAAP reporting because they believe it is a better analysis and a clearer point of comparison against stock carriers. It also gives [mutual insurers] flexibility for future business activity, says Jack Gibson, managing principal for the North American life practice at Tillinghast, the actuarial and management consulting business of Towers Perrin. Say they want to talk about demutualizing or being a potential merger partner. If theyre already doing GAAP and having it audited, those are major activities that would otherwise take an awful lot of time to create suddenly.

Problem Points

From a business standpoint, which is more difficultSAP or GAAP? It depends on whom you ask.

Statutory reporting can be down to the county level. Certainly you have numerous states to report to, whereas with SEC you only have one organization, says Melissa Harty, senior manager within the financial services group at BearingPoint. The statutory reporting packagecommonly referred to as the blankis the more detailed of the two and contains the notorious Schedule D, which covers investments.

But on the other hand, GAAP reporting requires more analysis, Gibson claims. GAAP involves more judgment and relies more heavily on what a company believes will occur in the future. Much of statutory reporting is formulaic and doesnt vary by company-specific circumstances, he says.

Insurers in each of the ownership categoriesmutual, publicly traded, and privately heldcontend, regardless of the type of reporting they are subject to, they face common challenges when trying to leverage technology to improve the process. The primary difficulty: Preparing financial reports is difficult to automate fully.

In a perfect world, you would push a button, and profit-and-loss statements and balance sheets would come out of some sort of consolidated reporting system, be it a data warehouse-based or a [single] general ledger application, says Harty.

But that just doesnt happen. The problem is the general ledgerthe backbone of an insurers accounting processdoesnt contain everything needed to compile regulatory quarterly and annual statements. Footnotes and other details dont roll off the ledger, Horgan says. Theres manual effort needed to extract that information. Insurers financial reporting technology initiatives therefore have tended to focus on removing points of manual intervention when they can and, where it still is necessary, making it less cumbersome for those responsible.

Consider United Fire & Casualty Company, a publicly traded insurer, which needed to improve its overall reporting process. We were meeting reporting deadlines, but it often was close, notes Dianne Lyons, controller for United Fire & Casualty Company. In 2004, the carrier installed Eagle Technologys WINGS financial reporting solution to replace an existing vendor-based financial reporting system.

While WINGS has the ability to interface with ledger systems using XBRL (extended business reporting language), for now the insurer relies on ASCII file reports to populate entries to the general ledger and creates Excel spreadsheets to import into WINGS. Because the platform does not handle SEC reporting, United Fire & Casualty manually converts the statutory reports from WINGS into GAAP. Our one issue with WINGS is it lacks a [GAAP] template, Lyons says. We spend a lot of time formatting those [SEC] statements, and Id like to spend more time on content and less time on formatting concerns.
Nevertheless, the insurer has been able to complete more efficiently some reporting procedures, such as required electronic filing that used to take several manual processes to accomplish but currently is handled in one step by WINGS. Overall, and combined with a reengineering of workflows by United Fire & Casualty, the system has had a marked impact on the companys financial reporting process.

Were now able to work on multiple statements at a time and, with seven P&C companies and one life company, that has shaved several days off our reporting process, Lyons says, adding United Fire & Casualty has achieved this result despite having fewer members in the accounting staff than in previous years. The real-time validation feature of the new platform vs. the batch validation of the old system has made the entire process more accurate and efficient.

Great Republic Life, a privately held carrier, replaced an existing vendor-based accounting platform with the Freedom general ledger and annual statement filing software from Fiserv in 2002. According to Scott Blount, treasurer at Great Republic Life, the new platform has helped the insurer cut the time it takes to generate typical internal financial reports from 45 minutes to 30 seconds and has made the overall process of completing annual reports more efficient.

Limitations of the previous system required the carrier to do manual journal entries, the volume of which was unduly time-consuming and limited the capability to include adequate detail. There are some journal entries I do each month where I have several hundred debits and credits. Instead of having to key them manually into Freedom, I generate them using a query that exports to Excel, and then I import from Excel into Freedom. [The new process] provides more detail and saves hours, Blount says.

However, going from the general ledger to NAIC reports still is a largely manual process, requiring printing spreadsheets and keying information into the separate annual statement system. The Fiserv platform does include an annual report writer that can allow carriers to produce much of the regulatory statement information directly out of data in the general ledger. However, Great Republic elected not to automate the process at the outset because it is comfortable with the manual process and doesnt want to spend the additional time and staff resources to do the data mapping that would be required.

Multisystem Migraines

Another problem insurers face is the typical array of different production systems in place at most companies creates barriers to efficient internal and external financial reporting. With so many disparate systems trying to feed the financial systems, it becomes very difficult to consolidate the data, Harty says. Forget about the financial technology parttechnology can go only so far if it isnt receiving the right kind of information.
Insurers may be dealing with multiple ledger systems, as well. If [insurers] have acquired a lot of companies with different ledgers, it creates challenges, says Horgan. Most larger companies have gotten a plan in place where they get as many companies as possible to one reporting platform and, as they bring additional companies in, they get them onto that platform as soon as possible.

CUNA Mutual Group is in the midst of a project to upgrade its mainframe-based legacy ledger system to PeopleSoft and is building a new data warehouse to provide a single source of information for financial reporting. Joe Bauer, external reporting manager at CUNA Mutual, reports that different policy administration systems, which support one or more of CUNA Mutuals different lines of business, create additional work for accounting when it comes to both management and regulatory reporting.

The PeopleSoft project will be completed in early 2005, and the company anticipates far-reaching results. We will be creating an effective financial architecture that enables our vision through better integrated processes. We will have more flexibility for organizational changes and expect to better streamline our processing. At a minimum, we wont have to continue to support the multiple systems we do now. And with the data warehouse component, were hoping to have faster access to better information, states Bauer.

CUNA Mutual expects the main benefits of streamlined processes to be seen in internal financial management vs. regulatory reporting. To do the actual statutory reporting, there are quite a few manual interventions we still will have to make, Bauer says.

Although CUNA Mutual is a mutual insurer, it does internal GAAP analysis in addition to its required statutory reporting. We decided to begin creating GAAP financial statements to manage our business a few years ago, Bauer explains. It provided a better perspective on our operating results, and it put us more in tune with how other insurers operate.

Data Dilemmas

Disparate systems also may contribute to data quality problems that can impact both internal and external financial reporting. Data issues tend to be more challenging to internal reporting, since that reporting tends to be more granular, Horgan maintains.

Legacy systems create other data issues that also impact financial reporting. There are many variations between how well data is handed off from operating systems to ledgers and whether good edit controls and automated reconciliation controls are in place, Horgan says.

Carriers that traditionally have reported on the SAP basis also may encounter difficulties when trying to add GAAP reporting because their systems were set up to capture data from administrative systems in a way that doesnt support both methods. Their current systems are set up to report on and create accounting transactions in the statutory format. Revenue recognition in GAAP is different, and the way the data is set up and flows through the system needs to be addressed, Harty points out.

In some cases, without some drastic changes to their systemscompanies arent able to capture that data [for GAAP]. In other cases, the data may be there, but it is hard to get at, Gibson says.

Additionally, insurers that first begin doing GAAP calculationseither by choice or by demutualization-driven necessityneed to determine whether to maintain one ledger and make either SAP or GAAP accounting adjustments or to maintain two ledgers or ledger systems. From a technology standpoint, the question for companies that demutualize is whether to have two sets of books to manage the information, notes Harty. Carriers struggle with how to implement that and to find the best way for their finance organizations to operate.

Another question that often arises is whether a data warehouse is needed for efficient and timely reporting. Its not essential, but it can be invaluable, Gibson asserts. The data warehouse can allow a number of interested parties to get at data that formerly had been difficult, if not impossible, to access.

Part of CUNA Mutuals initiative involves consolidating various data stores into a new data warehouse. Bauer says the company projects this effort ultimately will benefit both internal and regulatory reporting.

Its important to both. We will have better controls over data integrity, and all data will be in one location where everyone who needs financial information will have access to it, he explains. We can be confident we have all the data vs. compiling it from different sources.

Limiting the number of systems that feed data into the reporting process is a key benefit of a data warehouse. It allows insurers to go to one data source where critical data has been put through rigorous processes from source product systems all the way through the financial system. That allows them to better audit and comply with regulatory requirements, Harty says.

A final impediment to automation is the knowledge of how to map correctly the data from one system to another doesnt exist in the systems themselves. Older systems had different realities about how they stored data, and the way data is stored on some of these old systems could be extremely inconvenient to get to for analytical purposes. Also with older systems, you lose a lot of historical memorythe people who understand the systems and how they were created, notes Gibson.

Even if an insurer hasnt lost the staff members who have this knowledge, those staffers often have more pressing needs on their time. For example, time constraints have limited United Fire & Casualtys ability to do the data mapping needed to help automate report generation when the system was deployed. The potential is there and we plan to do that, but we didnt have time to take full advantage of all the capabilities of the system [at rollout]. The data mapping is not a difficult thing, but finding available time when were not tending to end-of-quarter activities is, Lyons says.

Transparency Trends

Unlike underwriting, claims, and other activities that directly drive the bottom line, regulatory financial reporting is seen more as an issue of compliance rather than revenue. Its difficult to justify devoting resources to [reporting] thats not used for internal purposes and is only done once a year, Bauer says. The rollup thats required by regulators really is a one-off activity.
However, complying with other regulations that deal with corporate transparencysuch as Sarbanes-Oxley and anticipated NAIC-modeled legislationhas caused insurers to take a closer look at their financial reporting processes and systems. Part of our new [PeopleSoft] project is making sure we have good controls over data integrity and reporting with an eye toward future laws and regulations, Bauer points out.
Particularly when it comes to manual data compilation processes and the ubiquitous spreadsheet, companies are concerned with where, how, and from whom figures were derived. While there is no longer overwhelmingly pervasive use of spreadsheets, they still are pretty important, and they still are present in some level of volume in the financial reporting process, says Horgan. Sarbanes-Oxley has driven an effort to identify where the critical ones are and where we can control them better. In the long run, it will drive more [calculations] off spreadsheets and onto a platform.

But he also doubts spreadsheets ever can be completely replaced. There are certain types of reserving analyses where spreadsheets are the best answer, Horgan asserts. Companies simply will have to get better controls around spreadsheets from both a compliance and change management standpoint.

Viewing the improvement of financial reporting as a compliance-only activity is seeing only part of the picture, Harty suggests. Certainly, if you have 100 employees crunching data and you put in an automated solution, you can take some of that cost out just in terms of FTEs [full-time employees], she says.
More important, what is the cost associated with reporting bad numbers? That is much higher, Harty adds. Improved information and the improved ability to give yourself some assurance in the numbers, thats almost priceless.

XBRL Revisited

Tech Decisions looked at the subject of Extended Business Reporting Language (XBRL) in detail one year ago (see Lucky Numbers, January 2004). After a year, little has changed on this front. A lot of people are familiar with ACORD XML at the transaction layer, but theres still not much familiarity with XBRL, says Paul L. Horgan of PricewaterhouseCoopers.
Even among the solutions in play at the insurers in this article, support for XBRL was mixed: Fiservs Freedom doesnt support it, but Eagles WINGS does. (However, WINGS produces only SAP statements, whereas Freedom handles both SAP and GAAP.)

While XBRLs adoption timetable isnt clear, most expect it eventually to become the standard for financial reporting. Most of the ledgers coming out today are coming equipped with XRBL tagging schema; its just not being used, says Horgan. The SEC also has announced it is going to do a pilot where it will accept tagged data on a voluntary basis. On the statutory side, several states are working to accept their regulatory statements in XBRL format. Regulators believe there are a lot of potential efficiencies on their side and the company side, as well.

Tech Guide: Financial and Accounting Software

AlphaSoft Marketing International
Nevada City, Calif.
530-478-1552
www.ialphasoft.com

AMS Services, Inc.
Windsor, Conn.
800-444-4813
www.ams-services.com

Balance Consulting Inc.
Ann Arbor, Mich.
734-668-1099
www.balanceconsult.com

Cabinet NG, Inc.
St. Athens, Ala.
800-621-6501
www.cabinetng.com

Captiva Systems, Inc.
Miami, Fla.
800-274-8300
www.captivasystems.com

CGI
Andover, Mass.
978-946-3000
www.cgi.com

Document Imaging
Greenwood Village, Colo.
877-732-8278
www.docimag.com

Eagle Technology Management
Marion, Iowa
800-975-3245
www.eagletm.com

Epic Solutions, Inc.
Mesa, Ariz.
480-969-2720
www.epicsol.com

Fiserv FREEDOM
Cedar Rapids, Iowa
800-322-4220
www.freedomgroup.com

Flexi
Shelton, Conn.
203-925-3040
www.flexi.com

Fulcrum InteTech
Napa, Calif.
707-224-7700
www.fulcrumit.com

GAAP Software, Inc.
Burtonsville, Md.
800-438-4227
www.gaapmga.com

Genelco Software Solutions
St. Louis, Mo.
800-983-8114
www.genelco.com

gotoPremiumFinance.com
Woodland Hills, Calif.
800-229-9822
www.gotopremiumfinance.com

IASA
Durham, N.C.
847-823-2868
www.iasa.org

The Innovation Group
Danbury, Conn.
203-448-2301
www.tigplc.com

Input 1, LLC
Woodland Hills, Calif.
800-229-9822
www.input1.com

Insight Decision Solutions
Markham, Ontario, Canada
905-475-3282
www.insightdecision.com

Perceptive Vision, Inc.
Shawnee, Kans.
800-941-7460
www.imagenow.com

Princeton Financial Systems
Princeton, N.J.
609-987-2400
www.pfs.com
SAP America, Inc.
Newtown Square, Pa.
610-661-1000
www.sap.com/insurance

SRC Software
Portland, Ore.
800-544-3477
www.srcsoftware.com

SunGard Insurance Systems
Roswell, Ga.
303-283-5452
www.sungardinsurance.com

Systems Union Inc.
Miami, Fla.
416-644-5544
www.sunsystems.com

Tata Consultancy Services
Naperville, Ill.
406-549-5600
www.tcs.com

Terrace
Oakland, Calif.
510-836-3400
www.terrace.com

United Systems & Software
Lake Mary, Fla.
800-522-8774
www.ussincorp.com

Verian Technologies
Charlotte, N.C.
800-672-8776
www.procureit.com

XDimensional
Technologies, Inc.
Brea, Calif.
800-789-2567
www.xdimensional.com

Xerox Global Services
Rochester, N.Y.
770-569-5668
www.xerox.com