Insurance investment managers are under extraordinary pressure.  On one hand, they can no longer get the returns they need from traditional low-risk investments such as government and Global 1000 bonds.  In fact, because many funds have been under-performing in relationship to the liabilities they have to cover, pressures to achieve higher returns have become especially intense.

On the other hand, those returns can’t be gained at the expense of unacceptable risk—especially with regulators keeping a close eye on how insurers factor risk into their total portfolios.

Unfortunately, insurance investment managers don’t have the tools they need to optimize returns and maintain full visibility into risk across their existing portfolios.  And they sorely lack the kind of sophisticated “what-if” modeling they need to accurately and granularly evaluate the potential impact of their investment decisions before they act on them.

With about 20 percent of the world’s $100 trillion total assets under management in the hands of insurers at stake—as well as the ability of individuals, business and governments worldwide to manage their risk through covenants with solvent underwriters—the inadequacy of insurers’ portfolio management capabilities is a non-trivial issue.

“Investment demands are exposing significant gaps in existing legacy systems and operational procedures,” writes Jay Wolstenholme, a senior analyst with Celent's Securities & Investments practice, in a new report entitled “Mind the Gap: How Vendors/Suppliers Can Meet Insurance Investment Management Operational Needs”.  “Those gaps include difficulty consolidating portfolios into one aggregate view, the resulting inability to produce required timely regulatory data reports without costly and error-prone manual intervention, and the inability to create accurate what-if analyses that incorporate real-time pricing and position data.”

Wolstenholme notes that the inability to model the impact of any given re-allocation on portfolio performance given multiple market scenarios can be particularly problematic.  “If you can’t readily model what your financial position will be if you make a given investment and then encounter a twisted yield curve X months later, it’s difficult to claim that you’re really stress-testing your solvency,” he says.

The good news, according to Wolstenholme, is that market necessity is likely to prove the mother of solution innovation.  This innovation could come from a variety of sources—including traditional software vendors, investment specialists distilling their expertise into commercial systems, and service providers offering turnkey portfolio management that relieves insurers of the burdens associated with implementing and maintaining sophisticated technology.

As markets become more volatile, technology that empowers insurance investment managers to quickly understand the health of their current portfolio and the potential impact of any contemplated changes in that portfolio will only become more essential.

“It’s going to become increasingly critical to finalize trading decisions based on fresh, accurate data,” asserts Wolstenholme.  “That’s why insurance investment managers are in desperate need of investment decision support systems that are fast, that can integrate all types of alternative investment instruments, and that provide analytic modeling that’s a good deal more quantitative and real-time than what’s in general use today.”

Register or login for access to this item and much more

All Digital Insurance content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access