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Insurance Investment Accounting

Outsourcing trends and challenges

Dennis Case

Independent Insurance Business Consultant

Dennis Case is an independent consultant with over 30 years of experience working in insurance asset management, with a special focus on optimizing investment accounting processes. We asked him 3 questions about outsourcing trends in the insurance industry today, and the questions to ask when choosing a service provider for investment accounting and operations.

Q1: In your experience, what challenges are insurance organizations looking to address by switching to a managed solution for their investment accounting and operations?

In the last few years, the challenges facing insurance firms have intensified significantly. These include the management of more complex asset classes, such as derivatives, structured securities, bank loans, private equity, debt, etc., constant regulatory change, as well as difficulties recruiting and retaining specialized resources with the required accounting and regulatory expertise.

As a result, many firms are re-examining all aspects of their operating model to optimize operational processes and maximize efficiency, so they can focus on their core business. This need to optimize and focus on differentiating work is pushing firms towards managed services for areas of the business considered non-core. One area where this trend is particularly evident is investment accounting and operations.

Many insurance firms are realizing that traditional approaches to investment accounting are no longer future fit, with current challenges serving to highlight the shortfalls of existing operating frameworks. For example, some legacy investment accounting systems have not fully kept pace with more complex asset classes and are therefore unable to adequately support the investment strategy. At the same time, legacy frameworks are struggling to keep pace with changing accounting regulations and reporting requirements, such as NAIC Statutory, local GAAPs and U.S. Tax.

These regulatory changes not only present challenges from a technology standpoint, but also from an expertise perspective. Correctly interpreting regulatory change and implementing the necessary procedural changes requires specialist resources with expertise in both investment accounting and regulation. Finding and holding onto talent with these skills is becoming a significant pain point for many insurers, where the loss of one or two key accountants can be devastating. Mitigating this keyperson risk is often a primary reason for switching to a managed service.

Q2: When speaking to insurance firms about transitioning to a managed service for investment accounting, what are some of the key barriers to adoption that you typically hear, and how can these be addressed?

Integration challenges with internal data models often comes up as a concern. Those firms grappling with data fragmentation and a complex system landscape may be concerned about a service provider’s ability to process their internal data, or even their own ability to re-integrate the accounting data generated by the service provider back into their own internal data-model.

To address this challenge, insurance firms should ensure the service provider offers strong connectivity to a broad universe of market parties, with the ability to integrate data directly from a range of different sources, including vendors, custodians, and third-party managers. This, combined with the ability to aggregate, cleanse, and harmonize data, can significantly improve data management challenges, and potentially drive front-to-back data integration along with more powerful data insights across the full investment value chain.

Another common barrier to adoption I hear is the fear of losing control, and the associated reputational risk that can lead to. Old fashioned outsourcing has often been a black box, and it’s this lack of transparency that has made people cautious. While firms can outsource the generation of accounting analytics and reports, the end responsibility for reporting the accounting numbers to stakeholders will always lie with them.

When chosen well, a managed solution should allow you to maintain full control of your data, while benefiting from improved service levels, i.e., increased automation, more timely information, better data integrity, and more time to focus on value-adding work.

Dennis Case, Insurance Business Consultant

That’s why thorough due diligence on any potential service provider is so critical. You need to be confident in their ability to deliver transparent access to timely, validated, and enriched accounting data that you can depend on. When chosen well, a managed solution should allow you to maintain full control of your data, while benefiting from improved service levels, i.e., increased automation, more timely information, better data integrity, and more time to focus on value-adding work.

Q3: What should insurance firms look for when choosing an outsourcing provider for their investment accounting?

When searching for an investment accounting service provider, insurers must evaluate numerous capabilities to ensure confidence in their eventual selection. A non-exhaustive list of questions to ask potential providers include:

  • Is the underlying technology proven and robust? What’s the provider’s track record in supporting the investment accounting needs of large insurance firms?
  • What asset class coverage does the solution provide? Can it support all complex asset classes as standard? In other words, will the solution fully support your firm’s investment strategy and growth ambitions?
  • Are there dedicated Service Level Agreements (SLAs) and a governance framework, with clearly defined KPIs, timelines and escalation procedures?
  • Which accounting frameworks are supported as standard? (i.e., local GAAPs, IRFS, Tax and US STAT)
  • For North American firms: do they provide NAIC reporting beyond Schedule D, such as Schedules B, BA, DB as well as assistance with statutory exhibits, footnote disclosure, interrogatory information, etc.?
  • Who is the team behind the service? Is it staffed by qualified accountants and operations experts with the necessary skills to ensure the accuracy of the data, investigate and resolve exceptions, and validate accounting analytics and reporting?
  • Does the service include a local advisory function, staffed by industry and accounting specialists? Are these specialists on hand to discuss accounting best practices, as well as keep you informed of ongoing accounting and regulatory changes?
  • Does the solution enable quick and standardized data interoperability? Does it provide turnkey connectivity to major financial market participants, including custodians, data providers, third party asset managers and trading venues? Will it remove the significant burden of having to maintain these integrations in-house?
  • Will the service allow you to maintain full control and visibility of your data? Does it include a cloud-native self-service portal, where all data can be accessed 24/7 and from multiple devices?
  • Do they offer services that go beyond investment accounting such as front office capabilities, IBOR, alternatives management, performance measurement, risk analytics, post trade compliance, collateral management, cash and investment income forecasting, and data warehousing? 

Ultimately, when choosing a service provider for investment accounting and operations, you need to be confident in their ability to consistently deliver accounting data that you can depend on, i.e., validated and verified daily data and signed-off period-end accounting data within a T+1 to T+3 timescale.

One final point to remember is there is no “one size fits all” solution. In today’s complex operating environment, insurance firms need to be empowered to optimize their operating model to fit their current and future strategic priorities. Optionality is therefore key, and the ability to throttle services up or down according to changing business priorities is what’s now separating the most progressive providers from other players in the market.

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