How to Handle Expected And Unexpected Risks

headshot of Andrea Hecht, CFO of CSAA Insurance
Courtesy of CSAA Insurance
The business of insurance is preparing for calamities, but how do the industry's CFOs guard against economic surprises? Andrea Hecht, CFO of CSAA Insurance Group, shares some best practices.

The insurance industry produces some staggering dollar amounts: insured losses reached $145 billion globally in 2024, according to Aon, the sixth costliest year on record. How do insurance company balance sheets absorb all of that? Fortunately, risk is what insurance is all about.  

“You know large catastrophic events will happen,” says Andrea Hecht, CFO of CSAA Insurance Group, “and you must be ready.” “Ready” can mean many things in insurance, but for the finance team, it means having plans to handle not only natural disasters but also economic shifts, like sustained inflation or a rise in long-term interest rates. 

At CSAA Insurance Group, an automobile and homeowner insurance provider based in Walnut Creek, California, Hecht’s job is to ensure disruptive events and economic surprises don’t wreak havoc on the company’s financial performance.  

In an interview, Hecht described some of the best practices she uses to safeguard the company financially and determine which levers to pull when the unexpected happens. 

How does the CFO pivot the company’s financial strategy when a major event happens? 

A key first step is recognizing the event’s impact on your key financial metrics. For an insurer, a significant event will affect measures such as the loss ratio [losses on claims relative to premiums earned] and surplus adequacy and topline metrics such as direct written premiums and policies in force [those active and providing coverage]. From there, the CFO can make informed decisions about the next steps, like cost cutting, rate filings [formal requests to adjust premiums] or pausing strategic investments until the organization’s financial position improves. 

The executive leadership team needs to understand the situation’s potential outcomes. If key leaders aren’t aligned on next steps, the organization’s strategy to shift outcomes will inevitably fail. 

Not all significant events are the same, of course. There are two types: things you know will eventually happen and things that are unexpected.

A good example of the first in the insurance industry is a large, catastrophic event. An example of an unexpected event would be the period of high inflation we saw over the last three to four years. Again, a CFO has to align the appropriate business units on how to react—whether that reaction includes raising rates, decreasing underwriting risk appetite or, in more extreme examples, shutting down growth. 

What can a CFO do to ensure financial stability for their company throughout the year? 

The foundation is a comprehensive financial plan directly tied to strategic objectives and reflects the current operating environment. However, the business must be engaged in producing this financial plan. Both top-down and bottom-up approaches should be taken.  

In addition, during times of uncertainty, the executive leadership must understand the range of possible outcomes. Often, that happens through conducting scenario planning. For instance, when inflation started to increase dramatically, we produced multiple scenarios based on assumptions of how long it would persist. That helped us understand which levers we would need to pull to produce the desired financial outcome. 

We also stress-test our capital to ensure financial stability in the event of a large wildfire, storm or other catastrophe during the year. Leaders across the organization must have the financial acumen to interpret those test results and understand the output of their decisions. 

What are some innovations you’re witnessing in the finance profession? How should CFOs adapt? 

The biggest innovation that comes to mind is the use of generative AI. It has the potential to impact everything from customer-facing interactions to fraud detection and prevention to helping analyze financial results. If fully embraced, it could dramatically impact our day-to-day work lives.  

I think it’s important for CFOs to help their companies think about responsible ways to use this technology and be smart about it from a financial perspective. AI is an area where you could invest heavily, and it’s the CFO’s job to ensure that an appropriate return is generated. 

What finance trends that were quiet in 2024 do you think will explode in 2025? 

Many insurance companies pivoted to cost-cutting strategies as inflation persisted in 2024. The market is beginning to soften [more competition among insurers to underwrite personal and business risks], so this year, we will enter a phase of investment. 

Gen AI indeed could explode in 2025. I also expect software-as-a-service or cloud-based solutions to continue their upward trajectory. On-premises IT investments can be expensive to maintain and slow to react to changes, whereas the cloud requires less IT infrastructure and can help you be nimbler.


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