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The property/casualty industry was profitable every year between 2000 and 2017 despite underwriting losses in 11 out of those 18 years, according to the Insurance Information Institute. This performance is a testament to the importance of investment income to insurers’ bottom lines. By leveraging premium payments as a source of capital, insurers are able to generate investment returns that not only offset underwriting losses, but drive growth. While profitability depends in large part upon this investment income, the insurance industry is plagued by patchwork systems of antiquated accounting and reporting platforms. These platforms are onerous to use, ill-equipped to handle the full spectrum of assets many insurers now hold, susceptible to key person risk and difficult to integrate with one another. As a result, investment teams struggle to interrogate data, translate it into interactive reports and leverage it to maximize returns on assets.
Insurers that want to upgrade their investment accounting systems are faced with a choice between investing and implementing new solutions in-house, or outsourcing to a specialist provider. Outsourcing can deliver access to specialized accounting and reporting technology that provides end-to-end coverage of all investment types and the ability to “see” key data that is inaccessible with legacy platforms, all without the upfront cost of an in-house solution.
To be sure, outsourcing can be a daunting prospect, as it requires letting go of systems developed by and for a specific company. However, the viability of outsourcing as a strategy for growth begins by determining the true cost of maintaining the status quo. It can help to consider the range of costs, some more obvious than others.
Licensing and maintaining current systems
A 2017 Forbes global survey of senior level-executives found that three-quarters believe the time, money and resources spent on the maintenance and management of their systems are affecting competitiveness. In the same survey, 37 percent of CEOs reported that the majority of their IT budgets are devoted solely to ongoing maintenance and management. More than half (55 percent) reported that these costs increased in the previous three years. Although these statistics reach beyond the insurance industry, they reflect the reality faced by many insurers: over-reliance on legacy systems that are loosely integrated and limited in their ability to produce comprehensive reporting. Add to this the cost of licensing and the results are far too much time and resources devoted to systems that fail to provide a competitive advantage.
Data vendor licenses
Very few legacy systems provide access to the underlying data necessary to complete complex investment accounting and reporting functions (e.g., pricing, security master data, quality ratings), requiring many insurers to contract with a data vendor. In addition, each data stream provided by vendors must be integrated into existing systems and monitored to ensure that accounting and reporting functions accurately incorporate data from all sources.
Supporting the IT footprint
Inevitably, multiple legacy systems with significant maintenance requirements result in a sprawling IT footprint and costs that are difficult to control. Direct costs, like those associated with hiring and retaining dedicated IT staff to manage the integration of accounting and reporting systems, are highly visible and easy to account for in the total cost of ownership. Indirect costs, which are allocated by percentage across all business lines, can be more difficult to calculate when considering the total cost of existing systems, but are just as important as direct costs when evaluating the viability of outsourcing accounting and reporting operations.
Lost time and opportunity cost
Because multiple systems that are not necessarily designed for use with one another are required to carry out basic tasks, those responsible for investment accounting and reporting frequently develop workarounds to accomplish desired functions. These manual processes greatly increase the chance of human error, and require staff time that could be better utilized for tasks that cannot easily be automated. Each second spent managing unwieldy systems is a second not spent focused on the insurer’s core priorities, and each dollar allocated to servicing inefficient systems is a dollar that cannot be invested elsewhere. Furthermore, legacy systems provide limited or no capability to assess how specific transactions will affect portfolio performance over time, representing a significant opportunity cost. Without access to this data, an information void is created that makes it more difficult for portfolio managers to allocate resources in a way that maximizes the value of the insurers’ holdings.
After assessing the total cost of ownership of their current systems, insurers can evaluate the benefits and risks associated with outsourcing investment accounting and reporting functions and are well positioned to begin discussions with outsourced providers. While outsourcing may not be the solution to every problem, transitioning to a system designed for today’s investing climate can help mitigate risk, increase efficiency and alleviate significant sources of operational pain.