Between falling fixed-income interest rates and the quest for superior returns via alternative investments, insurers are constantly reevaluating their investment strategies. After the operational dislocation arising from COVID-19, they should also be looking at investment operations to make sure they have the resiliency to support their strategies in a more dynamic market. From talking with insurance industry clients and analysts, we’ve identified five fundamental trends that insurers need to be mindful of as they weigh their operational decisions.
1. Investment platform consolidation: Today’s insurance investment portfolios are far more diverse than a decade ago, having evolved from traditional fixed-income to include listed equities as well as alternative assets such as hedge funds, private equity, private credit, real estate, bank loans, asset-backed securities and direct investments. Managing such diversity typically requires multiple front-, middle- and back-office systems, which is inefficient and does not allow managers to view their portfolios and performance holistically. Insurers need to find a way to consolidate systems and standardize operating models across these different asset types.
2. Increased accounting flexibility and transparency: Insurers are expanding into new geographic markets, where they encounter new and changing regulatory regimes and accounting standards. This calls for a flexible accounting rules engine that can rapidly adapt and adhere to evolving regional accounting and reporting requirements. Insurers also need greater transparency into accounting valuation and accrual methods for research, troubleshooting and audit purposes.
3. Real-time decision support powered by the middle and back office: In uncertain global markets, a real-time view of current cash and positions is more essential than ever. A timely and accurate accounting book of record (ABOR) is necessary for front-office investment teams to make investment decisions based on reliable, current portfolio data. It is incumbent on back-office operations and accounting systems to present accurate holdings and cash data to front-office systems so that portfolio managers can trade with confidence.
4. Driving efficiency for alternative assets: Some alternative asset types require much more manual processing and oversight than liquid listed assets. As a result, traditional investment operations models for alternative assets do not scale as efficiently as they do for core liquid assets. Insurers need to leverage advanced technologies to convert non-standard documents and pricing information into formats that allow automated processing for tracking and valuation purposes. They further need intelligent automation tools to identify and remediate trade, cash or position breaks on alternative assets in a timely manner.
5. Preparing for the shift from LIBOR to RFRs: Insurers often hold a number of rate-based investments such as bank debt. The transition from the London Interbank Offering Rate (LIBOR) to Risk Free Rate (RFR) alternative reference rates is expected to have a major impact on core transaction processing, investment accounting, cash flow management and reporting systems. Insurers will need to modify their systems to accommodate this shift in a smooth and efficient manner while minimizing business disruption.
In sum, today’s more diversified strategies and dynamic markets call for an agile, scalable investment operations infrastructure—supported by asset-specific expertise—that can readily adapt to new products, markets, rules, regulations, operating models and opportunities. Our new whitepaper, 5 Trends Insurers Can’t Ignore, delves into each of these trends in detail, the challenges they pose and the technology implications they raise. Download the whitepaper to better understand how these trends are likely to impact your operations, and how SS&C can help you manage through them.