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An investment environment dominated for years by low interest rates has created additional challenges for insurance companies. To boost returns, chief investment officers (CIOs) of these firms turned to alternative investments, private assets and high-yield bank loans. While these alternative assets hold the potential for higher returns, they bring lagged valuations and recognition of returns as well as idiosyncratic accounting.
In essence, the CIO decision to increase allocations to alternative assets has caused pain for Chief Financial Officers and accounting teams. The need for complex valuations produces pressure on accountants to provide quicker and deeper management reporting, a task made more difficult by the complexity of lifecycle events and additional reconciliations required for alternative investments. Insurance asset managers also attempt to provide detailed dashboards of information which often do not reflect the complexity involved with alternative investments.
The fact is, insurance requires multiple bases of accounting, including transaction reporting which requires characterization of buys/sells, income/receipts/amortization, and gain/loss reporting. To produce the desired level of reporting, insurance company accountants may try to smooth out the figures, resulting in an apparent level of stability that may not exist. Behind these smooth figures lies the uncertainty intrinsic to alternative investments. While the accountants may not intentionally be secretive, forcing valuations into neat boxes can have misleading effects.
Achieving Accuracy Through Outsourcing Non-Core Functions
A solution for bridging this gap between CIO and CFO is to outsource complex accounting operations to a qualified provider with the scale and dedicated teams to handle traditional and alternative investment asset classes. Particularly for self-managed assets, outsourcing avoids the business risk and overhead costs that come with attempting to enhance internal operations or optimize legacy systems which usually fall short in capability. It ultimately reduces the need for maintaining complex infrastructure to support functions that are not core to growing an insurance business. It can also lead to heightened transparency, stronger internal controls, more detailed reporting and enhanced compliance with the ever-shrinking timelines for closing books.
Crucially, by shifting this responsibility, staff members of insurance companies are able to focus on the higher value work of portfolio analysis, deferring the work of data aggregation, reconciliation, and assembly of statements to the external provider. This focus allows the CIO’s team to be more nimble in adding new asset classes and making other portfolio decisions more quickly, thus minimizing opportunity costs and other market risks.
Choosing an Outsourcing Partner
Once the insurance firm has made the decision to outsource its accounting valuation and reporting services, the insurance firm should extensively research potential providers.
- Technology: A key benefit of outsourcing is the ability leverage new technological advances without a heavy up-front investment. A comprehensive, robust system must be at the top of the list in selection criteria.
- Experience: Through years of experience, an outsourcing provider gains knowledge in a variety of reporting areas and has capability to support all investment types. The provider can use this experience to help overcome the firm’s unique challenges and achieve its goals.
- Size: The large outsourcing providers are often able to offer more flexibility in terms of responsiveness, technological savvy and experience.
By choosing the right CFO outsourcing provider, an insurance company can help take its business to the next level through the right mix of investments without requiring the cost and maintenance of an infrastructure that is not core to their business, while focusing technology investment on tools that bring them close to their policyholders.