The coronavirus pandemic has caused mass disruption to the global economy. Over the past 10 months, jurisdictions around the world have been forced to inject unprecedented amounts of fiscal stimulus into their local economies to provide financial relief. This challenge is piggybacking a period of multiple years in which central banks worldwide have been providing accommodative monetary policy, which has led to a prolonged low interest rate environment. This economic outlook is not good news for insurance companies, who typically depend upon a strong economy and healthy interest rates to make returns on underwriting and investment income.
“Insurance companies worldwide are having to endure this low interest rate environment,” said Michael Dahl (pictured), co-head, global insurance services at State Street - one of the world’s largest servicers and managers of institutional assets. “At the same time, they’re being hit with additional capital and expense requirements, whether that’s around particular lines of business that have been negatively impacted by the pandemic, or meeting regulatory compliance, or needing to upgrade technology due to COVID-19 and the need for remote capabilities. Many insurers are under significant financial pressure, and the low interest rate environment has created a need for them to analyze their investment portfolios and potentially consider investing in alternative assets.”
When companies invest in more complex asset classes, like private equity, hedge funds, venture capital, and real estate/commodities, they need a lot of data and strong analytics in order to get transparency and help the head office decision-makers determine if it’s a good addition to the investment portfolio.
Traditionally, some insurers have struggled with the data management side of their investment portfolios. Many have followed a ‘best of breed’ technology systems approach, where over the years, they have cherry-picked systems that are purpose-built to manage the data for specific assets at a specific point in time. The result of that strategy, according to Dahl, is that many organizations ended up with a proliferation of databases (known as data warehouses) that were very hard to navigate and utilize to generate reporting, analytics, and make investment decisions.
“What many insurers ended up with was a suite of hard-wired data management platforms that were purpose built for a specific point in time, but as soon as they wanted to add a new investment type into their portfolio, they hit a roadblock,” Dahl told Insurance Business. “Then they had to figure out how to incorporate those new asset types and deal with the regulations – and that often required another complete build on top of their existing data warehouse. Often, they also had to invest in new data managers or data governance experts who understood how to manage the data of that particular asset class.”
Data warehouses turned out to be “very expensive to manage” and far too inflexible for insurance firms as they evolved and grew. According to Dahl, it was an unsustainable strategy 10-years-ago, and it’s even more unsustainable today with the sheer amount of data insurers can get their hands on, and the urgent need for flexibility amid the COVID-19 crisis.
The move to new asset types driven largely by low interest rates is tricky in today’s expense environment. Alternatives are complex assets that require a lot of expertise, both in the investment itself but also in the operations, in terms of understanding the accounting of those alternative assets and the tax implications. But many insurance companies today do not have the time or money available to seek out and hire experts to manage new investment assets.
Dahl commented: “As a result, we’re seeing a significant uptick in insurance companies coming to State Street and saying: ‘As we try and move into these new investment types, we’re not as nimble as we need to be. We’re too slow, and it’s too expensive to bring on these new assets.’ So, they’re coming to us not only for advice, but also for outsourcing. They’re seeking a global partner who can manage alternative assets and take care of data management and compliance on a global scale. That way, as insurers flex and grow, and as their business and investment priorities change amid the evolving situation with COVID, they’re essentially future-proofed in the sense that we can handle their investment management for them.”
