The insurance asset management landscape has been evolving for some time now, particularly as long stretches of low interest rates have pushed many insurers beyond their fixed income comfort zones.
At the same time, the industry-wide push for digital transformation has brought glaring attention to the need for new technology to replace legacy systems that many insurers have leaned on for decades, as well as the need to master data management.
As insurers grapple with changing times and technology, piecemeal solutions will not do. Insurers need a holistic, integrated solution to take them into the next era of asset management.
Key pressures of the insurance asset management landscape
The challenges to insurance investment portfolios stem from three major themes:
- Evolving asset mix within a low-interest-rate environment — While insurers relied on fixed income investments for years to create returns and maintain their desired ratios, sustained periods of low interest rates forced many to adapt. Many have turned to equities and alternatives. According to a 2021 survey of insurers by Goldman Sachs Asset Management, 34% are ready to take on more portfolio risk. However, as insurers take on more complex private investments, they face the inherent challenge of gaining insight and transparency into how these investments are affecting their portfolios.
- Managing more data — With a broader investment mix, insurers will confront an expanding array of data that will need to be managed and shared across teams and stages of the investment lifecycle. Moving into riskier, multi-asset strategies means data is key, but if insurers can’t capture, consolidate and unlock insights from that data, they’ll encounter major blind spots as they seek to make informed decisions while managing their portfolios.
- Adopting new technology in the right manner — The legacy systems that insurers have leaned on for decades no longer serve them as insurance portfolios continue to shift from fixed income-heavy strategies to multi-asset strategies. It’s possible that existing platforms will not be able to support alternative investments like private equity, real estate and hedge funds, requiring insurers to spread their investment operations across multiple siloed tools, further complicating the data management challenge.
Finding the right path forward into a new era
To effectively oversee the expanded asset mix in insurance portfolios and optimize alpha creation, insurers need to adopt an integrated approach to technology and data practices. At a high level, consider how components of the investment lifecycle – the front, middle and back office – fit together into a whole office rather than viewing them as segmented, individual pieces. From front office investment decisions to middle office trade execution to back office reporting and accounting, the data from each activity feeds into the others. Because they all must integrate, viewing each activity as a separate domain will leave insurers with siloed data and operations, reducing overall efficiency.
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In transforming insurance investment operating models for the current era, two principles can guide decisions on how to scale up:
- Partnerships — Insurers have a history of building their own technology, customized to their particular needs. But that is changing along with the asset mix in investments. Consider the time and resource requirements if building investment and accounting tech in-house, versus the resources needed to develop and maintain client-facing applications. Many industry partners can offer existing technology to answer insurers’ needs alongside expert guidance and service.
- Integration — Impressive fintech solutions are being developed at a rapid pace, but they need to be properly integrated with the whole office to truly optimize the investment process. Managing just a few technology partnerships for investment operations can serve the investment team better than working across numerous different platforms and solutions. With this in mind, industry partners that can offer multiple capabilities and can integrate those capabilities offer a crucial benefit to insurers as they take on a challenging transformation of their investment management model.
Insurers have reached an important investing crossroads. Low interest rates may last for some time, and even when they do climb an embrace of alternative assets has changed how insurers are able to drive alpha in their portfolios.
It’s hard to overstate the importance of technology and data in today’s world, and getting a firm handle on both is crucial to decision making. As insurers work through investment management pressures, finding the right partners will help to optimize the whole office of their investment lifecycle.