Read the article and learn about:
- Why insurers are embracing alternative investments
- How to achieve operational efficiency
- The importance of data and analysis
- Industry complexity requires advanced accounting capabilities
Alternatives Investments Product Manager, SimCorp
Having grown rapidly in the last decade, the popularity of alternative investments is expected to continue to rise. Prequin estimates that half of all investors committed to private equity, hedge funds or real estate, now allocate a minimum 10% or more of their total assets1.
As with any investment category, the challenge for insurers where alternatives are concerned, is to achieve a finely-tuned balance among satisfying investor transparency, remaining cost-effective, reaping the highest returns, and minimising operational risk. The reality however is very different.
In a WBR Insights report surveying 100 North American buy-side heads of operations, alternative investments were among the most costly and challenging asset classes to manage (62%). The findings mirrored those in a similar report conducted in Europe (51%)2. A large part of the associated cost is related to outdated technology, as well as third party outsourcing, which many insurance firms currently use. The expense can be easily avoided with the use of a multi-asset class approach deployed in-house.
These findings are particularly worrying, considering they impact the ability to retain and attract new clients amid the allure of cheaper passive investment vehicles. To address this challenge, insurers should keep in mind three operational concerns if they are to reap the full rewards of alternatives investments.
Achieving operational efficiency
Achieving operational efficiency for a portfolio that includes alternatives investments requires a different approach, particularly when it comes to risk management, because alternatives are often opaque in nature. As Strategy& and PwC noted in a report, most private equity funds report information only quarterly, while the lack of mark-to-market valuations in commodities contracts can create pricing ambiguity. A consolidated operating model plays a key role in enhancing transparency, by bringing together all data points throughout the entire investment lifecycle into one system. In adopting a multi-asset class approach where alternatives investments are run together with cash and equities, insurers can eliminate the operational risk associated with harbouring important data in siloed applications and the painstaking manual processes undertaken to make it accessible across the investment chain.