Regulatory pressures, retiring workers and legacy systems will challenge insurance industry

Less than 30% of respondents to an independent survey of senior investment managers within global insurance companies said they were not concerned about the ability of their current systems to meet their future regulatory requirements, Northern Trust Corporation reported Monday.

Commissioned by Northern Trust, the survey involved 250-plus senior investment managers within global insurance companies, each with more than US$1 billion in assets, in the United States and Europe. Half of the respondents were from the C-suite of their companies and interviews were also done with technology leaders within the asset management divisions of large insurers, insurance industry consultants and senior executives of several insurance operations technology vendors. Survey data was finalized in December 2013.

Asked about the state of the global insurance industry, responses highlighted the investment operational infrastructure challenges that insurance companies will face, particularly in an era of regulatory change and financial pressures, notes a statement from Northern Trust, which provides investment, management, asset and fund administration, banking solutions and fiduciary services.

“Insurers will imminently face a number of complexities due to regulatory pressures, aging systems and a retiring workforce,” Andrew Melville, Northern Trust’s head of insurance product and strategy, Europe, Middle East and Africa, says in the statement. “Whilst more than two-thirds of insurers surveyed asserted their current investment systems perform well or extremely well, their abilities to be prepared for the investment infrastructure challenges ahead, will be significantly tested,” Melville adds.

Citing the Dodd-Frank Act in the U.S. and the Solvency II directive in Europe, the statement notes “these regulations will increase demands for products to help manage compliance requirements, monitor risk management and report on investment performance.”

Asked how concerned they were that their existing processes and systems will not meet future regulatory requirements, 72.5% of respondents reported they are concerned or unsure about whether to be concerned, notes the Northern Trust white paper, Looking Beyond Legacy Systems: Are insurance companies prepared for the investment infrastructure challenges ahead?

Specifically, 29.9% of respondents said they were concerned, 42.6% said they were neither, and 27.5% said they were not concerned.

Half of survey respondents cited their current systems as “customized with obsolete code” and most respondents expect that as much as a quarter of their staff will retire within the next five years, the statement notes. “As many of their legacy systems have been modified by multiple programmers over the years with little documentation, maintaining these existing systems will similarly be a challenge as programmers retire or leave the company,” Melville suggests.

Of those surveyed, 11.2% said less than 5% of operations staff is within five years of retirement; 33.9% said 5% to 10%; 39.4% said 11% to 25%; 13.5% said 26% to 50%; and 2% said more than 50%.

“The operational landscape of the future will require sophisticated infrastructure systems to manage and make sense of investment data – an administrative burden that is sure to stretch insurance companies’ resources,” the paper notes.

The survey also found some respondents believed insurers should move away from customized software vendors and systems in favour of standard industry platforms, provided by the outsourcing industry.

They were asked: Regarding the degree to which your processes and systems are customized, how much do you agree or disagree that they need to move to industry standard systems so you can buy “plug and play” solutions?

On a scale of 5 to 1 – with 5 representing strongly agree; 1 representing strongly disagree – 19% of respondents chose 5; 47% chose 4; 31% chose 3; 3% chose 2; and 0% chose 1.