Additionally, gaining automation through consolidation is a key advantage. In the current asset management landscape, while many asset managers can achieve relatively high Straight Through Processing (STP) in the management of traditional asset classes, finding that same level of automation and integration for growing illiquid, alternative investments has proved difficult. Asset managers, including those of insurers, have tried to overcome the fragmented, legacy and best-of-breed systems by spending significant money on niche systems, to automate workflows between the front and back offices. The reality is that this has simply served to create a complex medley of expensive systems and heavy manual reconciliation, to bridge data gaps and ensure accuracy. Simplifying this tangled infrastructure and gaining automated front-to-back investment management is essential to reducing operational cost and risk, but also in delivering the innovation that is vital in the search for investment returns.
Data and analysis
Data and more specifically data management, is becoming a key concern for investments operations teams, given the burgeoning volumes, sources and uses of investment data on already overburdened legacy infrastructures. Data aggregation, for example, has become an almost impossible task. Accurate measurement of firm-wide limits and counterparty exposure was one of the top challenges for heads of operations in both North America and Europe, according to the WBR Insights report. It’s not hard to see why, when to do so firms must aggregate data that are not only split across multiple sources, systems and interfaces, but may also need scrubbing or cleansing to gain any meaningful analysis.
To overcome this challenge, firms must address the discrepancy between data available in the back office and front office. Empowering the front office with greater transparency, through integrated solutions that deliver accounting analytics and functionality will ultimately better inform the decision-making process and enrich simulations for portfolio management. By bringing together the data in all these disparate systems, into one single Investment Book of Record, insurers can leverage firm-wide data for superior analytics, which provides a distinct competitive advantage. Given that one of the hardest elements in managing alternative investments, is the data itself, this is a notable advantage indeed.
Like its peers, insurance asset management arms will now have to contend not only with multiple accounting and tax frameworks, supporting local generally accepted accounting principals such statutory accounting principle or international standards like IFRS, across multiple currencies, but also comply with growing global regulations and compliance standards. Recent regulations such as Europe’s Alternative Investment Fund Managers Directive and the U.S.’s Foreign Account Tax Compliance Act, which have recently come into play, are already causing a stir.
In their report, Strategy& PwC said that managing regulatory compliance is now becoming one of the largest challenges where the back office is concerned. As this regulatory compliance evolves it will demand more from a firm’s accounting support than ever before. Bridging the GAAP has never been more important.
If this was not enough, insurance firms, also have a distinct complexity to deal with compared to the rest of the buy side, with multi-tier legal and company structures that require reporting to authorities across different jurisdictions and geographies. While many of these institutions have traditionally turned to outsourcing to address this mammoth task, increasing obligations have caused a shift, where many asset managers are finding themselves running a shadow book of record to ensure data received back from their outsourcers are indeed the same data that are being sent out to regulators. Operating on a single source of truth for accounting and regulatory reporting in-house will not only cut down on costly duplication and arduous reconciliation, but also deliver further control and advanced accounting analytics capability, relieving in-house talent to focus on more high value tasks.
Given the attraction between insurers and alternative investments, insurance asset management arms, particularly those operating on a global scale, will need to assess what it takes to close the gap on returns, while managing the balance between transparency to its investors and keeping operational costs and risk low. Though it may be tempting to forge ahead without much adjustment to existing infrastructure, those that adopt a consolidated infrastructure, with an IBOR at the heart of operations and standardize workflows that integrate to the firm’s Accounting Book of Record (ABOR), will be the best model for sustained growth. With the same support for alternative and traditional asset classes in one system, insurance asset management can deliver new investment strategies and products quickly, manage data and decommission costly systems and interfaces, making alternative investments a relationship that will stand the test of time.
NB: This article originally appeared in Pensions&Investments, October 18, 2018
1. (7 June 2018), Alternatives Investments: A core asset class, Journal of Applied IT in Investment Management, SimCorp
2. (2018), Buy-Side Operations: Cutting Through Complexity, WBR Insights