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The benefits of budgeting: A Zurich case study

There are so many insurance company in this world and one of the is Zurich Insurance Group
which a leading global provider of insurance services. Zurichs mission is to help customers
understand and protect themselves from risk. The company employs 60,000 staff and serves
customers in 170 countries around the world.

Zurich offers General Insurance and Life

Insurance products, for example:

General Insurance: car insurance, home buildings and contents insurance

Life assurance: life insurance, investment and pension plans.

Zurich offers its products to retail customers (mainly individuals) and corporate customers (i.e.
Life is full of uncertainty. The building you work in could catch fire. Your computer could be
stolen. You may have an accident. These are all risks with a small but real probability that they
may occur therefor, Insurance provides protection against that risk. In return for a fee (a
premium) it provides a financial payment in the event of financial/personal loss.
Supporting the brand
The fact thats makes Zurich one of the leading insurance companies is starts with Zurichs brand,
reputation for quality customer service and solid financial strength. The insurance industry is
tightly regulated, requiring strict standards and highly skilled finance professionals. Zurich,
therefore, aims to attract the best graduates. Zurichs ethos is underpinned by its core values:

A key component of Zurichs values is corporate responsibility. Being a responsible company is

fundamental to Zurichs long-term sustainability.
What is a budget?
One of the most useful financial tools is the budget. A budget is a business plan expressed in
financial terms. Budgets can be drawn up for sales, costs or investment spending. A budget will
include a degree of prediction of performance which is usually based on past data, e.g. sales.
It is important that it is a realistic financial plan that the business can fulfil. Managers at all levels
will have their own budget plans, designed to co-ordinate with and contribute to the overall plan
or master budget. Therefore, managers need to be involved in contributing information to the
budget to which they will be committed.

Budgets should be stretching but achievable. They should enable companies to meet both short
and long-term financial and strategic objectives, whilst providing motivational targets
(potentially linked to bonus payments) for managers to promote the right behaviours. There are
three point that important:
1. All budgets must be carefully monitored,
2. reviewed and,
3. if appropriate, re-assessed as internal factors (e.g. a major project costs significantly less
or more than expected) and external factors (e.g. regulatory developments) change.
Core business segments
Zurich has three core business segments:
1. General Insurance (e.g. car, home),
2. Global Life (e.g. life assurance, pensions and investments)
3. and Farmers (core North-American business).

For example, the table below shows the revenue and expense budgets for UK Life. The expenses
budget is broken down by function. (All figures are for illustration only.)

Benefits of budgeting
Budgets are reflect a financial representation of an organisations strategy. The process of
budgeting requires managers to plan ahead, for example, to identify the resources required to
meet targets. This is particularly important in the insurance industry due to the complex nature of
the products offered. Insurance generally addresses medium- and long-term needs of customers.
Decisions taken now are likely to have financial implications for many years to come.
Analysing Variances
The budgeting process can be used for monitoring and control of financial performance. Results
can be reviewed as frequently as necessary against budgets to identify good and poor
performance areas. Managers need to investigate the difference or variance between budgeted
and actual results. Where actual figures are worse than budgeted, these are called adverse
variances. Adverse variances may suggest problems. Where budgets are not being met, action
can be taken. Budget targets can be highly motivational and staff who meet or exceed budgeted
targets may be rewarded with bonuses.
Challenges of effective budgeting
Suppose sales volume, prices and costs were all projected to rise annually by 10% (incremental
budgeting). This would make budgeting easy, but it is highly unlikely. To increase sales may

require price reductions and discounts. Successive rises in sales volume might bring economies
of scale, but might need investment to expand production in order to meet that demand.
Effective budgeting is full of challenges. Whilst financial accounts relate to the past, budgets are
about the future. All data is therefore planned rather than actual, probable rather than definite.
Budgets are based on a number of assumptions. Some of these are explicit, such as what the cost
of labour and raw materials will be or what market research results indicate about likely
customer demand. Others are more implicit. A change in leadership in the sales team, a good
relationship with a new supplier or changes in the organisation's external environment could all
affect budget projections.
Zurich may face unanticipated changes in legal or financial regulations or a change in market
dynamics brought about by economic factors or the actions of competitors. An insurer needs to
predict the risks its insurance policies protect against, both short-term risks, such as floods and
earthquakes and longer-term risks, such as mortality rates. Budgets also need to reflect the
business need to invest in specific projects or long-term improvements.
Zurich Business Partners
Budgets may also cause conflict between departments. For example, the allocation of additional
budget to sales and marketing could result in operational areas receiving a reduced budget.
Within Zurich, conflict between departments is resolved with the help of Business Partners.
These work with the different departments to achieve an appropriate and fair division of the
budget, in line with the business and senior managements objectives.
Analysing budgeting data may uncover opportunities that would otherwise have remained
hidden. Therefore budgets must be set using the best information available but have flexibility in
order to respond to the changing business environment.
Setting and using budgets
The process of budgeting devided in two ways:

'top-down' - i.e. set by senior managers and directed downwards, often based on previous

bottom-up - i.e. evolving upwards from middle managers, through the use of detailed
analysis, for confirmation by senior management.

In practice, at Zurich there are elements of both approaches. Senior management undertakes the
topdown 'ambition setting'. This gives the strategic context. Managers then consider historical
data, prevailing trends and any new drivers in order to formulate proposed budgets.
Zurich Business Partners help to ensure 'joined-up budgeting' between areas of the business:

Revenue centres generate income. They prepare sales budgets.

Cost centres generate expenses. They prepare operating or production budgets.

The profit budget draws together all the budgets for revenues and costs to meet overall
financial objectives.

Zero-based budgeting
An alternative approach to incremental budgeting is zero-based budgeting. This means that each
expenditure budget starts with a zero allocation each year. Managers must justify each element of
the budget they propose. This has the advantage of making managers think proactively about
what funds they need. It also avoids the tendency simply to add a percentage of the previous
years budget or assume that expenditure will remain the same. However, one major

disadvantage of this approach is the increased demand on staff time, which is an expensive
resource with an opportunity cost.
Monitoring the budget
The first results against budget may show that the business is not exactly on target. The budget
then becomes a dashboard to assess all the factors and make the necessary changes to reach
goals. Variance analysis is used to identify differences between budgeted and actual figures. This
can be demonstrated using the illustrative expenditure budget for UK Life.

Results better than or on budget are 'green' and represent no immediate problem. They may be
worth investigation to understand new practices or to exploit new opportunities.

Results that are only mildly outside expectations are 'amber'. These may need attention
particularly if there is a worsening trend. Finally, there are the adverse (red) results. Red areas
demand immediate investigation and remedial action to bring performance back to budget. All
results should be investigated based on the level of risk each deviation poses to meeting the
overall business goals, but priority should be given to red areas.

Zurich Business Partners assist managers in understanding and explaining current performance
by identifying the root causes of any deviations from the budget. They also look forward
known as forecasting to assess how those deviations will affect the performance compared to
the budget over the remainder of the period and in the context of overall objectives.
A deviation may be explained by an unforeseen event; it may be the beginning of a major
adverse trend that requires a counter-strategy. Analysing recent trends can act as an early
warning system and may indicate how the business performance will evolve in the future.
The Zurich brand is associated with trust and reliability. Quality is at the heart of its customer
appeal. However, it is also about innovation and being an industry leader, both in its operations
and responding quickly to emerging risks and opportunities. This allows Zurich to deliver what
matters when it matters. The budgeting process is a source of competitive advantage. Effective
budgeting requires careful research and realistic planning as well as collaboration. It can help to
set high objectives or move the business into new territory. The level of stretch or challenge in a
budget will depend on an organisations culture and ambition. Some businesses may be prepared
to accept a higher risk profile for a better return. This in turn will depend on the influence of key
stakeholders, such as shareholders.
To ensure the company has the capability to achieve its aims, Zurich employs graduates and
finance professionals who are skilled in managing and interpreting budget dashboards.