Investing in the Investment Lifecycle

As insurers plan out digital transformation initiatives, they shouldn’t overlook their own asset management operations.

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The insurance industry is obviously committed to digital transformation, with InsurTech and established firms turning out customer-facing apps at a relentless pace. This focus is understandable: easing enrollment, claims processing and other critical functions brings the user experience in line with increasingly tech-savvy market expectations and can provide a crucial competitive advantage.

But while customer-facing technology advances, a gap is growing between insurance investment portfolios and the tools that CFOs and CIOs are using for portfolio oversight and accounting. Insurers need to consider the growing risk of outdated investment operations as complex alternative assets and derivatives take up a larger share of general and separate account investment portfolios.

A timeline of insurers’ reliance on alternatives

Many insurers, particularly in the property/casualty space, operate with a combined ratio greater than 1.00, making the performance of their investment strategies critical to sustaining their business. But the traditional bond-heavy insurance investment portfolio has been under stress for more than a decade, since central banks cut interest rates to fight the Global Financial Crisis of 2008. Over the past year the economic effects of the pandemic reinforced the low-rate regime and forced insurers to double down on their embrace of more complex strategies to generate the yields necessary to meet their obligations.

The issue of interest rates is top of mind for many insurers. According to Cerulli Associates, 88 percent of insurers name low interest rates as a top factor of concern.[1] But as insurers have moved to embrace hedge funds, private equity investments and OTC derivatives, they haven’t updated legacy systems to monitor and service them. These alternative assets can be much more complex than bonds or public equities, posing challenges from valuation, tax or regulatory reporting perspectives. Technology can help insurers meet those challenges while maintaining productivity and managing risk.

Modernizing the front and back office

In updating the investment process, insurers should look at both their front and back offices.

From a front office perspective, decades-old systems built for simpler stock and bond portfolios are not up to the task of allocating complex portfolios across multiple investment managers and asset classes. It can be difficult to gain a strong understanding of what’s working or not working in an investment strategy that includes complex, hard-to-value private and alternative assets. Investment teams should not have to use multiple disparate tools and attempt to manually gather data together to get a full picture of their portfolio. By focusing on the right technology, insurers can gain streamlined understanding of their investment strategy by looking through one powerful platform that unites all asset data.

When it comes to back office operations, it’s time to face the challenge of tracking complex portfolios on spreadsheets and the risk inherent in manual processes. Like other large asset owners, insurers have an opportunity to rely on a centralized investment book of record (IBOR) with one dataset covering all financial product types. When all data lives on a single IBOR, back-office teams aren’t conducting manual data entry and spreadsheet merging—practices that increase the risk for error. As the data is prepared for accounting processes, the books should be locked with clean data thanks to quality control checks.

Keying into these ideal practices across the investment lifecycle requires strong data management practices and interoperable platforms. To meet these needs, insurers can take one of two routes: build or buy.

  • Build: Developing technology from the ground up offers the benefit of total customization, which is a strong consideration for customer-facing capabilities where your brand can shine through. But insurers might question the value of devoting significant internal IT resources to develop, test and deploy resources to support investment operations, not to mention keeping up with the responsibility of platform maintenance.
  • Buy: Buying or partnering with a technology platform allows insurers to plug into an existing offering without the burden of platform development and maintenance. The embrace of cloud-based platforms within the asset management industry has allowed for eased onboarding processes compared to technology partnerships of the past and could be a strong option for insurers that are able to find an existing solution customized closely enough to their own unique needs.

Committing to a complex portfolio for the long haul

In a persistent low-interest rate environment, insurers will remain committed to managing complex, alternatives-heavy portfolios. To find the best degree of productivity, risk reduction, and performance returns, digital transformation efforts should extend from the visible, customer-friendly tools to investment, accounting and other back-office system improvements. Insurers who seize on the opportunity to optimize their investment technology will put themselves in position to emerge from this pandemic-fueled volatility in strong shape—and able to adapt as times continue to change.

[1] Cerulli Associates, “Low Interest Rate Environment Could Portend Insurance Industry Consolidation”, September 2020.

Christopher Dvorak // As the Head of Insurance Solutions, Christopher Dvorak leads all aspects of Northern Trust’s relationships with insurance companies including their insurance asset bases as well as their defined benefit and defined contribution plans. Before assuming this role, Dvorak was the Global Head of Relationship Management for Northern Trust Hedge Fund Services (NTHFS). Dvorak brings a substantial base of operations and investment expertise to his work. He was part of Omnium’s leadership from its establishment in 2007. Initially serving as a vice president overseeing fixed income operations, he became the Head of Relationship Management in 2009. Previously, Dvorak worked for Citadel Investment Group as Vice President of Global Fixed Income.

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