September 11, 2017 by Canadian Underwriter
As insurance firms invest in more complex securities, they struggle to manage data and meet regulatory reporting requirements, a newly released study has found.
Addressing local regulation and accounting standards is the leading operational challenge when it comes to firms’ expansion strategies, according to the survey, titled 2017 Insurance Asset Management Technology Outlook and released on Monday.
The survey, by SS&C Technologies Holdings, Inc., a Windsor, Conn.-based global provider of financial services software and software-enabled services, was conducted among a global audience of over 145 insurance and asset management professionals. Participants were asked to respond to seven questions on current challenges, concerns and the future direction of their investment management operations, SS&C noted in a statement.
Christy Bremner, senior vice president of SS&C institutional and investment management, said that this year’s survey signifies that insurers are becoming more comfortable with expanding their investment strategies. “Processing new security types, ranked as the number one operational challenge of 2016, has become less significant in 2017,” she said. “In fact, the percentage of participants that selected this as a top challenge dropped by more than half.” Percentage of respondents that cited processing new security types as a top challenge dropped from 48% in 2016 to 17% in 2017.
“However, as global regulatory regimes grow more complex, insurance firms are required to produce more frequent and detailed disclosures on holdings and exposures,” Bremner continued. “A single system capable of accounting for and reporting on a broad range of asset classes significantly reduces the operational risks posed by a patchwork of systems. Our survey shows that firms are responding by increasing both technology spend as well as adoption of cloud and hosting providers.”
As firms employ new investment strategies, they require accounting for an expanding array of non-traditional instruments, which presents some challenges, the statement said. Addressing regulatory and accounting standards (44%), lack of knowledge and talent (32%), processing new security types (17%), and coordinating with global entities (7%) are some the operational challenges faced. To help alleviate the burden on staff, firms are adding to their roster of external portfolio managers. In fact, 46% of those polled plan to increase use of external investment management over the next three years, the statement said.
Firms in search of higher yields and greater portfolio diversification are also gravitating toward private equity, hedge funds and other partnership investments (42%), as well as alternatives (22%). Survey respondents cited overall operational risk (29%), cybersecurity (22%) and regulatory risk (18%) as their chief risk concerns. Market (17%), talent (10%) and model (4%) risks ranked low as concerns.
Global asset growth, escalating trading volumes and increased reporting requirements have led to an explosion of data that needs to be organized, filtered and managed for analysis and reporting, the statement went on to say. Many firms are finding that large data infrastructures are increasingly difficult to maintain. As a result, the majority of insurance and asset management executives polled (61%) intend to increase technology spend within the next year to support investment operations.
“Maintaining data is a major hurdle for firms as it needs to be organized, accessible and easily managed,” noted David LaMonica, head of U.S. insurance at SS&C, in the statement. “Forward-thinking firms are looking ahead to solve this by increasing technology budgets to ease data management challenges. While the insurance industry has been slow to adopt technologies to manage data when compared to other industries, the survey shows that year-over-year progress is being made.”
Over half of asset managers (58%) polled anticipate increasing use of cloud technology and hosting providers, a trend consistent with last year’s study. “Cloud-based technology hosting enables firms to not only improve accessibility of data, but also reduce their IT footprint and overhead,” the statement concluded. “As operational models continue to evolve, insurance firms are taking a closer look at the overhead needed to support their core investment activities, while also driving greater efficiency. Rather than bolting on to legacy systems, many firms are choosing to partner with technology hosting and service providers to leverage innovative technologies and streamline processes.”
OSFI needs to understand what they are looking for. They never did understand ORSA but simply followed international rules.