One of the trends we’ve been writing about over the last year or two is the increasing tendency for insurance and reinsurance firms to look to add a little additional risk, or juice, to their investment portfolio returns.
In a low-yield world, where central bank interest rates hover around 0% and in some cases have fallen to negative rates, it’s hard for insurers to make much of a return on their asset portfolios at all.
Insurers and reinsurers typically invest their premium income, or the float, in assets that are duration matched with the anticipated timing of claims and payouts. This matching of assets to liabilities is a core part of the business model, but with asset returns down and re/insurance pricing softening too, re/insurers are looking to add something extra.
The typically secure insurers investment of choice has always been government and corporate bonds. But even these favoured assets are no longer providing a return that can help insurers and reinsurers at a time when some are struggling to maintain technical return hurdles internally.
So there’s a trend for insurance and reinsurance firms to look to new asset classes, such as alternatives, or simply to look to assets which offer an extra couple of percentage points of return. This is seeing more and more re/insurers adopting slightly higher risk investment policies, perhaps narrowing the strategy gap to hedge fund reinsurers.
But re/insurers need to manage this change in strategy for this low-yield world, and here is where SS&C Technologies Holdings, Inc., a global provider of financial services software and software-enabled services, believes it can help.
SS&C has launched an accounting and reporting service for insurance and reinsurance companies to support their increasing use of non-traditional assets.
SS&C notes that “the insurance industry has been searching for ways to enhance risk-adjusted return, given the continued challenge of a low interest rate environment.” However it says that managing non-traditional asset classes requires complex investment accounting and reporting, which legacy re/insurer systems often don’t support.
“Traditionally accounting and reporting for Schedule BA assets and syndicated bank loans has been largely manual and managed on spreadsheets. Insurers reaching for yield are turning to these non-traditional asset classes as they typically provide higher returns in the long run,” commented Tim Reilly, Senior Vice President and General Manager, SS&C Institutional and Investment Management. “Outsourcing accounting and reporting to SS&C moves these assets off spreadsheets to a more controlled environment and rigorous process. SS&C’s service, available as part of a full service offering or on a component outsourcing basis, enables insurers to automate accounting and reporting of these investments.”
SS&C’s service automates the accounting and reporting of non-traditional assets, which are seamlessly integrated with General Ledger and Treasury applications. Insurers benefit from web-based reports which are customized to fit individual requirements.
SS&C’s services for syndicated bank loans include tracking the lifecycle of loans and secondary events, reconciliations between custodians, agent banks, and asset managers, balancing of Schedule Ds as well as valuation and reporting. SS&C’s full administrative service for Schedule BA assets, such as limited partnerships, includes the recording and posting of all partnership activity, reconciliation to partnership statements, GAAP equity method accounting, and reporting on a STAT, GAAP and a tax basis.
While the low-yield economic environment persists, insurers and reinsurers are going to face lower returns on their investment portfolios. Usually losing a percentage point or two on investments could be put up with, but while returns on business underwritten is declining, due to lower rates and pricing, insurers and reinsurers need every extra point of return they can get.
As a result it is expected that asset class selection will change and there will be an increasing push towards alternatives, which make new tools like SS&C’s valuable to the market.
Insurers and reinsurers need to manage themselves out of the difficulties that they face, often the best way to do that is with technology and tools that can make their work simpler and more efficient. While pressures persist on both the top and bottom line for insurance and reinsurance firms, initiatives like this that can help them manage a higher risk, or more alternative focused investment strategy, will likely become more prevalent.