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The operations departments of Insurance Investment Managers are witnessing a surge in activity. They are searching for innovative solutions to address rising customer expectations, a complex regulatory landscape, and the increasing disparity in the quality and volume of data between the front and back offices.
Over the last twenty years, numerous investment managers, including those within the insurance sector, have often relied on human resources instead of adopting new technological solutions. This reluctance to modernize applications and infrastructure has led to increased costs. As firms strive for transformation, leveraging experienced resources can significantly enhance results.
AGING INFRASTRUCTURE
Insurance company investment back-office teams often rely on outdated accounting platforms created over two decades ago. These systems, built with legacy technologies and old code, were not designed to handle the recent surge in regulatory demands, tighter risk management, and heightened client expectations. To quickly comply with new regulatory demands, Insurance Investment Managers frequently add new code, use spreadsheets, or outsource data aggregation instead of overhauling their outdated infrastructure.
These stopgap measures add complexity and expense to any potential system upgrades or replacements that firms might consider. Although these locally implemented technology solutions were once cutting-edge, they now lack the flexibility and scalability of contemporary system architectures.
OPERATIONAL RISK
Aging infrastructure heightens operational risk. However, the significant cost and scale of platform changes often deter firms from acting promptly. This hesitation can worsen existing operational risks, such as:
- Discrepancies in data between front, middle, and back office functions due to varying levels of tool sophistication.
- Increased likelihood of human or accounting errors as processes are burdened by outdated logic and code-based calculations.
- Inadequate data governance programs that fail to map data lineage, ownership, or authority.
- Outsourced functions lacking proper controls or oversight.
Operational excellence can lead to long-term cost reductions by systematically addressing accounting, trading, and compliance data errors. Nevertheless, justifying the substantial effort required to realize these benefits remains challenging.
OPERATING MODEL IN TRANSITION
Insurance Investment Managers understand data’s crucial role in operations and recognize its intrinsic value. Therefore, they cannot remain dependent on an inefficient point-to-point system connection, often likened to a ‘spider web.’ Rapid changes in regulatory demands and market competition necessitate a more agile approach. Leading firms have long adopted data models based on hub-and-spoke or data-layered architectures. This shift in the operating paradigm is multifaceted and drives the implementation of robust data governance practices.
MAKING THE BUSINESS CASE FOR A TECHNOLOGY UPGRADE
Eventually, the risks and costs associated with manual workarounds and the inability to adapt to evolving needs surpass the risks of implementing change. Upgrading or replacing systems is a complex process that can take years to complete. The likelihood of success in these initiatives is significantly enhanced by leveraging experienced professionals who understand complex project management, the intricacies of updating accounting platforms, and the infrastructure of supporting technological solutions.
Convincing the C-suite to approve an upgrade that could cost tens of millions of dollars and take several years is a significant challenge. CEOs favor investments that drive revenue growth over upgrading existing infrastructure. However, committing to such spending without considering long-term ROI is impractical. Modern technology offers opportunities to build scalability, enhance client experiences, and better align product segments.
Manual processes are replaced with straight-through processing and automation, which achieves efficiency gains. Single, shared data repositories improve the speed at which business intelligence reaches the front office and management. Retiring older applications and stop-gaps frees up valuable resources. Although this evolution is time-consuming and costly, the outcomes support long-term asset growth under management (AUM), revenue, and scalability.
EVOLVING INDUSTRY PLAYERS
In recent years, the range of providers catering to the multi-basis accounting needs of Insurance Investment Managers has broadened. These providers now offer capabilities extending beyond traditional investment accounting to support local GAAP, IFRS, statutory accounting standards, and Schedule D reporting.
SS&C’s CAMRA, Portia, and State Street’s PAM were the leading solutions for decades. However, in recent years, SimCorp Dimension and BNY’s Eagle Investment Systems have secured significant contracts with global insurance firms. Additionally, Clearwater Analytics is gaining momentum with its managed service offering.
Following the example set by their asset management counterparts, insurance companies are increasingly outsourcing segments of their investment operations to custody banks and specialized firms like Conning & Company and BlackRock’s Aladdin. These firms are now prominent choices for vendors, outsourcing, and managed service solutions focused on insurance companies’ back office operations.
CONCLUSION
While the traditional, stone-columned buildings of insurance firms symbolize long-term stability, the software applications supporting their internal investment operations might be approaching obsolescence. Operations and technology teams supporting Insurance Investment Managers face immense pressure to maintain outdated technology while meeting the constant influx of new investors and regulatory demands. These upstream gaps particularly impact performance calculation and reporting.
Neglecting to update applications and infrastructure leads to increased costs. When firms decide to implement changes, experienced resources can significantly enhance the outcomes. Meradia has assisted the operations and technology teams of investment management companies and insurance investment managers for over two decades. Throughout this period, we’ve identified trends specific to the insurance sector. Our extensive experience and insights can help your organization avoid common pitfalls and support your change efforts with skilled consultants.