Like an understudy suddenly thrust into the starring role, the investment portfolios of insurers are suddenly subject to an entirely new level of scrutiny in the age of the toxic asset. To be sure, keeping track of portfolios that are as dynamic as they are large is no mean feat, especially considering the openness and transparency now expected by investors and regulators. Fortunately for insurers, this once labor-intensive process can now be automated with an emerging class of financial management tools that are designed to track assets in a complex and fluid environment. Take a look at why employing these tools may be critical to an insurer's survival.

In the fourth quarter of 2008, Blue Cross & Blue Shield of Minnesota's treasury and investment department was using a homegrown compliance engine and accounting system, and its analysts were laboring in spreadsheets to number-crunch their portfolios. While tedious and time-consuming practices, the firm lacked an investment accounting system with rich data mining capabilities. That's when it decided it needed to make a shift.

Now, just months after implementing an automated financial asset management tool from Clearwater Analytics, the Eagan, Minn.-based health care insurance provider enjoys a clearer view of its overall portfolio, which consists of 15 separate investment portfolios (or "sub-portfolios") totaling almost $2 billion, according to John Orner, VP of business development of treasury and investments at Blue Cross & Blue Shield of Minnesota, and president and CIO of Capital Asset Care Inc. The technology, called Insurance Analytics, has enabled the carrier to drill down to a particular sector across its portfolios to get a precise sense of its total exposure within that space. It also has ensured that the carrier is in compliance with state regulations and corporate bylaws across all its portfolios.

"The solution was pretty critical to our investment portfolio management," says Orner. "Paperless transmittal of trade activity, real-time importing of that activity, real-time compliance review - those are things that are important to us as we manage funds both internally, and manage external fixed income and equity managers."


Prodded by a variety of factors, including increasingly complex portfolios, rising costs, stricter regulations, the desire to boost transparency, or a variety of factors, insurers are moving away from the old-school manual analysis of portfolios that was marked by innumerable Excel spreadsheets and burnt-up analysts' hours. Public insurance companies need to report their finances to the Securities and Exchange Commission, and are obligated to comply with Sarbanes-Oxley, particularly with sections 404 and 302, which require that they document the effectiveness of their controls and certify the integrity of their financial statements.

At the same time, a slew of newer regulations, such as those related to extensible business reporting language (XBRL) and other-than-temporary impairment (OTTI) accounting, have either been imposed, or are being finalized. And when the CFO or the board calls its corporate treasury department to find out about the firm's exposure to a certain issue or asset class (like auction-rate securities), it is vital that the investment officer or treasurer quickly provide a good answer. "'I'll get back to you in a couple of days,' just doesn't cut it anymore," says Courtlandt Gates, CEO of Clearwater Analytics, a Boise, Idaho-based Web-based reporting and analytics firm. Automation of the financial reporting process has not only reduced the work time and the risk of resource-strapped insurers, but it has enabled them to focus on value-added activities that help them make better decisions about their portfolios and improve returns.

Injured Workers Insurance Fund (IWIF), a Towson, Md.-based workers' compensation insurance provider, migrated in March from an enterprise portfolio system provided by Wayne, Pa.-based SunGard to an investment management product called iWORKS, in part to allow it to have more open reporting periods. Now it can, for instance, work on year-end data for 2008, which can take months, while inputting January and February 2009 data into the system, so it no longer has to scramble to complete the latter after closing its books for year-end.

With close to 700 line items in its $1.5 billion portfolio spread over eight different managers, IWIF has found greater clarity and agility by using iWORKS.

"Our portfolio has grown substantially over the last 10 years, so it is just getting too onerous for human input on some of these things, especially during the present financial crisis, where credit ratings are changing every four to six hours, so it seems," says David Hinks, fixed income portfolio manager at IWIF. The amount of data he personally has to input has been halved, freeing him up to concentrate on more research.

After leaving behind its in-house solution-one with spreadsheets about 10 sheets deep with pivot tables-IWIF found SunGard's OTTI module to be a "godsend," says Hinks. Previously, the carrier spent hours working on spreadsheets to satisfy an outside auditor who frequently changed the criteria for whether or not the company needed to write down a security. Now when the auditor provides new criteria, IWIF comes up with the new numbers in a mere 60 seconds. "It is just beyond measurement of what [the module] saved us in dollar terms and man hours," says Hinks.

OTTI has emerged as a hot-button issue as insurers struggle with soaring unrealized capital losses and write-downs, and remain susceptible to additional write-downs as their unrealized losses age. While Blue Cross & Blue Shield of Minnesota has not leveraged Clearwater technology for its OTTI 157 activity, which it instead has handled on a one-off basis, it will likely call upon the technology to deal with that and other challenges sometime this year.

The issue of OTTI "continues to evolve, so it is something that is front and center for us," says Orner. "Hopefully the write-down activity has come to a halt with markets recovering somewhat, but we have to keep it on our watch list."


In serving insurers' treasury and investment departments, Clearwater sees its competitive advantage as its ability to provide a comprehensive solution that constantly is integrating a range of departmental data and thus producing consistent information. "Daily integrated accounting, compliance, performance and risk reporting is absolutely critical," says Gates of Clearwater Analytics. "It is not a nice to have; it is a must have."

Many insurers combine vendor solutions to simplify financial asset management. Delta Dental Plan of Arkansas uses Financial Software Innovations Inc. (FSI) technology for automating its annual statement preparation, SunGard software for investment tracking, and Microsoft Dynamics for general ledger reporting and accounts payable. SunGard feeds data to FSI for its statutory reporting, and feeds financial asset information to Microsoft Dynamics for its U.S. Generally Accepted Accounting Principles (GAAP) reporting on monthly financials. Delta Dental found investment tracking to be cumbersome, until it implemented SunGard solutions in March to track both statutory investment reporting and GAAP investment reporting, says Phyllis Rogers, SVP and CFO of the Sherwood, Ark.-based dental insurance provider.

Delta Dental embraced such financial asset management technology to further enhance its transparency and compliance, while improving functionality and ease of use. "We have always been open and transparent," says Rogers. "But the new technology also affords additional board reporting, and we are very excited to give our audit and finance committee some different looks in our investment portfolio. This will give us another look at the data with additional reporting, and some nice graphs that we can use to illustrate the make-up of our portfolio."


In an attempt to make it easier for investors to analyze financial information, the SEC has established rules for public companies and foreign private issuers that prepare their financial statements in accordance with GAAP and foreign private issuers. These rules allow them to prepare their financial statements using international financial reporting standards (IFRS), as issued by the International Accounting Standards Board. Companies are to provide their financial statements to the SEC, and put them on their corporate Web sites in an interactive data format using XBRL. Deadlines for who is required to use XBRL are being phased in, with the largest public firms mandated to transition first. 

While this has sent one tide of insurers to look for new technology and vendors, Treasury Secretary Timothy Geithner's call for stronger standards of openness, transparency and, common-sense language throughout the financial system may help propel an even broader range of carriers to adopt financial asset management technology, according to Gordon Burnes, VP of sales and marketing for OpenPages Inc., Waltham, Mass.

"XBRL is a very tangible example of how financial services companies can deliver openness and transparency because it is a standard way of reporting, it provides an open platform for investors who consume the information, and it is a standard that has been vetted by industry experts and participants," says Burnes. "Companies will, in the end, be more highly valued when the risks in their business are more transparent." He expects widespread adoption among insurers of standards such as XBRL and IFRS because of the intense focus on fiscal transparency.

Other industry initiatives may further move vendors and insurers to manage assets using XBRL. For instance, IBM's Data Governance Council, which is composed of 50 large financial companies and other organizations worldwide, launched an initiative in December of 2008 for XBRL to be the global standard for risk reporting. The momentum toward XBRL has helped lead to "a gold-rush mentality around XBRL," as vendors have swarmed into the market, says Burnes.

Even though they need not adopt XBRL by 2011, as public companies are required to do, non-public insurers such as Blue Cross have felt its pull. "It is on my wish-list because it's just a matter of time that something like that, or a derivative thereof, will affect not-for-profit organizations," says Orner.

IFRS, which some countries in Europe have made compulsory, may well go global too, or at least cross the Atlantic. For that reason, SunGard plans to make its solution IFRS compliant. "This openness and transparency that the Treasury Secretary talked about transcends international borders," says Burnes. "And the extent to which there is an international standard that investors worldwide have embraced, then U.S. companies will want to embrace that standard as well."

This is not to say that insurers have moved quickly to comply with new standards, such as XBRL. "The reality is that just because of the economic circumstances, companies are leaving many of these things until the last minute," says John Turner, CEO of CoreFiling Ltd., an XBRL software and solutions provider in Oxford, England. But in an environment where actionable information is absolutely critical and compliance is paramount, forward-looking carriers are aggressively exploring options for automating and simplifying financial asset management so that they can streamline processes, enhance productivity and facilitate smarter investment decision-making.


Trying to track their assets in a market in which stock prices and credit ratings gyrate wildly, insurers often prefer to leave the job of keeping up with evolving regulations to their vendors. Take the International Financial Reporting Standards (IFRS).

While it has seen its insurance clients that are foreign-owned moving far more quickly to IFRS than U.S.-owned carriers, SunGard received a flurry of inquiries in early 2009 from U.S. insurers, both small and large alike, as to how IFRS could affect them, says Michelle Dennis, VP of strategic operations at SunGard. This may be in part because the move by U.S. insurers to IFRS may be inevitable. Carriers "are going to be expecting [IFRS-compliant capabilities] to be in the products, and for vendors like ourselves to have those solutions ready for them," says Dennis LeBar, senior regulatory and accounting specialist at SunGard.

Indeed, to keep their insurance customers happy, technology providers not only have to offer the appropriate financial asset management technology, but also must track and inform insurers of potential regulatory changes, and quickly adapt their products to conform to the new standards.

"Our vendors are really good about updating their software when there are changes in the law to handle the new reporting requirements, non-admitting assets or in cases where we may have to impair assets," says Phyllis Rogers, SVP and CFO of Delta Dental Plan of Arkansas. "Being able to track those impairments accordingly for GAAP and for statutory reporting is important because the treatment can be different between the two reporting methods. It makes it even more important to use software that can track those changes, and have a vendor that can keep up with the regulations."

User group meetings between insurers and vendors also have been invaluable in advancing the education, understanding and demands of financial asset management technology among the partners.

David Hinks, fixed income portfolio manager at Injured Workers Insurance Fund (IWIF), has seen major benefits from participating in a summit advisory council in which various insurers discuss their regulatory, accounting and other challenges with SunGard. For example, IWIF discussed its concerns over convertible bonds, and found that other insurers echoed the concern; consequently, SunGard adapted its technology accordingly to deal with convertibles. Due to fast-moving insurance trends and needs, SunGard recently increased the frequency of such advisory councils from annually to quarterly.


In Europe, the financial asset management issues that are keeping insurers up at night are somewhat different from those in the States. Solvency II, a forthcoming regulatory requirement for carriers in the European Union, is a particularly critical driver for insurers in implementing new financial asset management technology, says Brian Heale, product director for Tillinghast Software Solutions, a business of Towers Perrin in London that provides global actuarial and management consulting. Once enacted, Solvency II will impose requirements on insurers concerning their capital levels, governance and risk management, and disclosure and transparency. Consequently, carriers will assess their solvency every three to six months, rather than annually.

"We have even served some customers now who want almost sort of a market risk or solvency dashboard, where every day they can get an overall picture of the change in their solvency," says Heale.

Interest among insurers is surging for technology that supports a wider range of enterprise risk management structures. Furthermore, European insurance firms have witnessed the emergence of the "chief risk officer"-an official who grills the actuarial department about its controls, where its data is from and how it knows that the data is correct. "Increasingly a technology-based solution for this audit control and these requirements" is a must, says Heale.


Insurers looking for lodestars to navigate the financial regulatory waters have no shortage of options. Decisions that will impact how insurers account for their finances are quietly being made in places including Norwalk, Conn., and London, while long-running legislative battles grind on in both Brussels and Washington.

"Insurers need to remain engaged because there are a lot of moving parts," says Rajiv Basu, national leader for IFRS services, for New York-based Deloitte.

A good example of this is the tussle over the adoption of International Financial Reporting Standards (IFRS). This battle is illustrative of how political considerations often influence non-political processes.

Under the previous administration, and its Securities and Exchange Commission (SEC) Chairman Christopher Cox, the move toward mandatory adoption of IFRS by American companies seemed to be inevitable. However, after the election, and some comments from new SEC Chairwoman Mary Schapiro, this sense of inevitability seems to have dissipated.

"Mary Schapiro has a slightly different take on IFRS," Basu says. "She wants to understand what it means and whether we're outsourcing standards-setting to a non-U.S. organization."

Basu ventures that the growing uncertainty means the once firm 2014 deadline for U.S. companies to adopt IFRS standards is now looking less like a certitude. "It will probably slip a year or two because a lot of U.S. companies have pushed back about whether everyone's ready to incur that kind of expense and time," he says.

Yet, Basu says a pertinent question is whether the deadline matters at all. He notes that the London-based International Accounting Standards Board, which is responsible for IFRS, and the Norwalk, Conn.-based Financial Accounting Standards Board (FASB), which oversees the generally accepted accounting principles (GAAP) under which most U.S. companies currently operate, are working on roughly a dozen joint convergence projects. The upshot is that by the time U.S. companies are required to make the switch to IFRS, the standards may well be near identical.

"While officially we will not yet be on IFRS, there will be so little difference it really won't matter," Basu predicts.

Overall, there seems to be a broad movement away from the rules-based approach to compliance enshrined in GAAP toward the more principles-based philosophy found in IFRS, Basu says, but adds that in some cases, IFRS is moving closer to GAAP, and in some cases, GAAP is moving closer to IFRS. One particular instance of the former is for fair value calculations, where the GAAP standard is the only one articulated.

Daniel Joelson is a freelance business writer based in Alexandria, Va.

For more financial news, search "The Accounting Standards Convergence Divergence Game" at

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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