The insurance industry has seen a lot of changes in the wake of the COVID-19 pandemic, and some of those changes may become permanent. Traditional investments have experienced a prolonged decline in returns, driving insurers to diversify their portfolios into alternative assets, which has increased both risk and complexity. SS&C recently conducted a survey to assess the state of investment operations among leading North American insurers to determine their plans and ability to adapt to new challenges.
A majority of North American insurers recognize that increasing intelligent automation to reduce the cost of investment operations needs to be a top priority. Despite that, only a few firms have implemented the technology so far. One of the biggest challenges they face is quantifying the return on investment and making the business case for Artificial Intelligence (AI) and other automation-based technologies.
Companies can be hesitant to change their investment accounting and analytics provider. Most have been using the same provider for between one and ten years, with a significant percentage (43%) using the same solution for 10 to 20 years. This reluctance to change is largely attributable to the perception that changing a core operational platform is a daunting and costly task. However, these companies are losing out on innovations and capabilities that have become available in the past few years. Newer technologies can decrease overall operating costs while improving data access, quality and transparency, while simultaneously improving risk and performance measurement. In a prolonged low yield environment, the need to increase operational efficiency and productivity to drive down costs and increase profit margins is more critical than ever.
Diversification of asset types is another challenge insurers need to manage as they respond to low interest rates. Alternative assets add complexity and risk. Unique valuation policies, adjustments and event processing activities driven by non-standardized notices require added man-hours, driving up costs and increasing the risk of error. The tracking and documentation for bespoke aspects of each deal add yet another layer of complexity, making pro-active risk management even more crucial.
To complicate matters further, most surveyed firms said they are currently using multiple systems to pull in data for risk analysis. For these firms, sophisticated, integrated analytics can simplify risk and performance measurement by helping to monitor correlations between asset types and potential impact across holdings and portfolios.
What about AI?
AI, machine learning, predictive analytics, natural language processing (NLP) and robotic process automation (RPA) are taking root in the industry. While they have yet to reach the impact that was predicted a few years ago, 35-50% of firms report looking into those technologies in the near future. The challenge they face lies in properly quantifying or rationalizing the business value. Technology companies need to do a better job of matching technologies to customers’ needs to help insurers formulate strong business cases with measurable results.
One way that companies can reduce the cost and strain on resources needed to implement automation technologies in-house is to leverage outsourcing providers. Outsourcing has become a trend among insurers, as it can help them take advantage of new, intelligent technologies without incurring a huge upfront investment or steep learning curve. This outsourcing trend increases the need for technology solutions that can aggregate, consolidate and reconcile transactions, holdings and cash data from external and internal managers for risk management, performance measurement and reporting purposes.
To read more about the survey, download the full "The Transformation of Insurance Investment Analytics, Operations and Accounting" report.