Articles - Insurance Asset Management, North America

Complex regulation and increasing investment sophistication is interrogating the adequacy of insurers’ operational oversight and resulting in this increased third-party custody. As the tenacious search for yield continues, there are signs that legacy back office systems are failing to manage compliance requirements, monitor risk management and report on investment performance to the appropriate appetite.

 But what are the opportunities?

 In the ‘Insurance Asset Management, North America’ report, published by Clear Path Analysis, Nicholas Liolis, Chief Investment Officer, Axa Equitable, argues the toss: “Insurance asset management is at an inflection point that presents a considerable learning opportunity. What brought us here is a “perfect storm” in our business environment.” Insurers must turn regulation and risk into a new opportunity through effective asset management, the right technological tools and informed outsourcing."

 Commentating on the trend towards more ambitious investments strategies David Sullivan, Insurance Practise Leader, Americas, Northern Trust, states: “A recent survey of chief information officers and chief financial officers of insurance companies reported 43% would increase their allocation to bank loans, a significant increase from previous years and a trend potentially bringing significant operational impact.”

 Such change and sophistication will inevitably create operational burdens on insurers. According to Sullivan: “In the long-term, current systems of oversight, processing, reporting and administration may prove to be inadequate to meet the resulting challenges”

 He goes on to define a two phase move to outsourcing: “In the first phase, many investment firms decided to focus on investment and distribution issues, letting other firms deal with the challenges of supporting back- and middle-office systems for their equity and bond investments. In the second wave, investment firms have begun to outsource systems for derivatives, private equity and other complex securities.”

 In this second wave much discussion has been had around the global bond universe. Commenting on this is Paul Forshaw, Head of Insurance Asset Management, Schroders, “The market value of the global index is 2.5 times that of the US and there are getting on for twice as many different credit issuers to choose from. This allows for the construction of more diversified and arguably more liquid portfolios {…} At the same time, a broader opportunity set means an increased ability to generate extra return through relative value trading. The result should be a higher Sharpe ratio.”

 But equally additional risks must remain managed as Forshaw states: “Investing in global fixed income exposes you to non-US duration exposure and therefore to changes in non-US interest rates that may not mirror those in the US. Other valuation inputs such as inflation rates and economic cycles may differ, and increasingly there are geo-political risks to consider, such as the European sovereign debt crisis”

 In such complex situations technology is crucial for enhanced investment and operational management, and as Ivan Matviak, Chief Executive Officer, Princeton Financial Systems, Head of Global Exchange Software Solutions Group, State Street, comments that “If you outsource it, you have to make sure that you have a knowledge base inside the company that has an understanding of the business operations that still understands the technology and can still service the business effectively.”

 Matviak expands: “What is really important is to have technology that is flexible and can handle the evolution in investment strategies fairly seamlessly whether you’re doing that in-house, using third party software or outsourcing. That flexibility is critical because you want to be able to handle new investment strategies in a way that’s cost effective”

 Robert Absey, Senior Vice President, Head of Global Financial Institutions, AllianceBernstein, supports this stating that “on the investment side, technology is crucial. This is illustrated by the myriad of internal proprietary models we’ve developed, as well as optimization, prioritization, and surveillance tools used in the investment process. On the insurance specific side, we also use technology to help us on a variety of fronts such as with our Asset Liability Management (“ALM”) analysis, capital allocation projects, and pricing models.”

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