For years, insurers have used short-term investments to protect capital while also generating a return, similar to a Treasury bill index fund or another similar benchmark. Although they typically offer lower rates of return, short-term investments like CDs, money market accounts, government bonds, Treasury bills and other marketable securities are highly liquid and can be easily converted to cash, giving insurers the flexibility to withdraw money quickly, if needed. Short-term investments also offer lower risk with more stable returns during periods of higher market volatility. Any increases or decreases in the value of an insurer’s short-term investments are directly reflected on the company's quarterly income statement; therefore timeliness, accuracy and efficient management of these investments is critical.
In our experience, we have found that larger insurance companies may create short-term investment “pools,” borrowing and lending excess cash between and among internal legal entities in order to maximize short-term investment opportunities and the use of all available cash. While no two insurers manage short-term pools in the same way, there are a number of common challenges, such as growing costs, administration, compliance, risk and scalability—especially as investment pools grow and become more complex. These challenges can result in operational inefficiencies that may negatively impact returns. Over time, these operational challenges often go unchecked because the pool is treated as a narrowly envisioned side activity that supports a mandate (checks a box) instead of a real opportunity to optimize yield.
In this blog, we look at the role technology plays in addressing common pain points to expand the potential of an insurer’s short-term investment pools.
When we begin talking with large global insurers about optimizing their short-term investment pools, we start by learning about their current process. We find out what internal and third-party systems and vendors are used to support the process, any limitations, and what priorities and process improvements they desire in their future-state operating model.
Invariably, the origin stories involve various combinations of homegrown tools, spreadsheets and external support services that have become difficult to maintain, have even limited the pursuit of certain investment types, and make for unwieldy user experiences. Common feedback we hear from prospective clients includes:
- The current framework does not allow us to flex with the market or with our business.
- Adding a new asset class is nearly impossible.
- Our system is not scalable enough to support our continued growth and increased volumes.
- Our process is very labor-intensive, highly manual and inefficient.
- We are at risk of missing our tight reporting deadlines.
The Next Chapter for Short-Term Investment Pools
With an acute need for flexible and scalable solutions that reduce manual tasks and improve accuracy and efficiency, “short-term pools” are ripe for optimization. If insurers are working with the right strategic partner, the technology should be readily available to you, configurable and with the automation to streamline the process from start to finish.
Engage an insurance investment accounting provider who specializes in advanced technology and has the industry experience to develop—with short turn-around time—a solution that meets your unique specifications, including as those needs evolve and expand over time. At SS&C, we are confident we can help insurers achieve their strategic objectives by starting with an innovative and insurance-centric platform that addresses all of the most common pain points with advanced technology at its core. Then, we leverage our deep and broad insurance investment expertise, gained over 37 years serving large global insurers, to create the optimal short-term investment pool infrastructure and process that meet our clients’ unique needs.
The list of short-term pool use cases we have improved is always growing. To learn more about how you can optimize the potential for your short-term investments, read our "Mastering the Operational Challenges of Short-Term Investment Pools" whitepaper.
Written by Scott Kurland