Is Legacy Technology Holding
Insurance Companies Back?
Life is quite a bit more complex than it used to be for insurance companies.
Insurers have increasingly turned to complex, high-yielding investment instruments, creating new data management challenges.
Especially now that they are trying to meet the long-term needs of their policyholders in a (recently ended) era of low interest rates. Many of them have turned to more complex, higher-yielding investments to generate better returns; and those investments have, in turn, created complex data-keeping issues.
A perfect example of the headaches they face? Bank loans.
While it’s easy to pull data about scores of stocks or even individual bonds from several well-respected data providers, getting data on individual bank loans requires contacting each agent bank to ask for the particulars.
And the difficulties don’t stop with acquiring the information associated with instruments such as bank loans — keeping it up to date, analyzing it and reporting it to regulators is challenging, too. Many bank loans offer revolving credit, meaning that the loan principal changes constantly. When it comes time to file reports with regulators, insurance companies have to ensure they adhere to the individual standards of each country in which they do business, not to mention the differing standards of tax authorities and various regulators within countries.
And bank loans aren’t the only new investment option that has insurance companies chasing their tails.
Alternative assets comprised 5.8 percent of insurance company investments in 2014, a 61 percent jump from 3.6 percent a decade earlier, according to Patpatia & Associates. Allocations to hedge funds have risen some 11 percent per year since 2008. And while leveraged loans used to be a rarity in insurance portfolios, insurance companies held $18 billion of them at the end of 2014, according to the National Association of Insurance Commissioners.
“All of those assets enable increased returns,” pointed out Rick Enfield, head of Software Product Management at State Street. “But the processing involved is also much more complex.” Alternative assets are less liquid than traditional stocks and bonds, making it much harder to classify, price and assess them for risk. For example, a private equity company’s stake in a privately held business is harder to value than a stock that changes hands frequently over the course of a trading day. And to value and assess a hedge fund investment, insurers have to know exactly what the funds are investing in—and what those underlying assets are worth. Not only do insurers have to assess and price these assets for their own risk-management needs, but they also must report them to regulatory authorities—something that becomes difficult with dated technology that wasn’t built to handle complexity.
Interestingly, Ivan Matviak, head of our Global Insurance Services, noted that pressure from the retail side of the insurance business may help drive insurance companies to invest in top-notch data analysis and management systems. Some insurance companies have contracted information-gathering to outside firms and invested in data management platforms that simplify the reporting process.
That’s important because unless insurers are careful, it’s possible their front offices will become more nimble than their back offices, leaving the latter scrambling to create workarounds to facilitate the needs of the front office. The worst-case scenario? A disparate system full of half-baked solutions that don’t resolve any one problem completely. The solution? Insurance companies must resist the temptation to prioritize investments in revenue-generating front-office technology solutions at the expense of the equally important back-office technology.