In establishing and managing an investment strategy, insurers are faced with navigating myriad challenges, including historically low interest rates, increasingly demanding regulatory requirements, volatile economies and financial markets, and the proliferation of complex investment strategies and alternatives. Given the dynamics of this demanding market environment, there is a heightened focus on optimizing risk-adjusted investment performance.
Regardless of current investment strategy, insurers can reveal opportunities to refine their approach by performing periodic, comprehensive reviews of in-house operations and capabilities.
Regardless of current investment strategy, insurers can reveal opportunities to refine their approach by performing periodic, comprehensive reviews of in-house operations and capabilities. By reevaluating critical internal factors and weighing the costs and benefits of utilizing external managers, insurers can be proactive in helping to drive investment performance.
Optimizing the Internal Operating Framework
When contemplating a potential change in investment strategy or approach, or simply when seeking to refine current policies and procedures, it is best to undertake a thorough review of internal investment operations. Not only will this exercise highlight current strengths and areas for improvement, it will also form the baseline to evaluate the impact of such changes. Below is a suggested framework for tackling this assessment:
- Refresh investment governance. Make sure your investment governance is structured to optimize decision-making and address issues that hamper effectiveness. A top-to-bottom review should cover: policies, objectives, liability hedging strategies, and risk budgets
- Analyze new investment opportunities. Investment strategies and products are expanding rapidly, providing insurers with a growing opportunity set of asset management alternatives. Assess the full range of investment approaches — including specialty and non-traditional strategies — to make sure that you’re taking advantage of alternatives that offer potential.
- Measure outcomes against peer groups. Establish a schedule for periodically benchmarking your portfolio against outside managers with similar strategies. Evaluate the quantitative and resource demands of your in-house management with external providers
- Re-evaluate your relationship with cash. Do you view cash viewed as a strategic asset class? Are you modeling cash flow sensitivity? Is there a credit facility in place to fund unanticipated cash needs? Be intentional with how liquidity is managed — include analysis of the trade-offs between current income and total return.
- Assess resource needs for analysis, reporting, and oversight. As the complexity of investment management grows, you need sophisticated reporting infrastructure, including advanced analytics to improve decision-making. Identify your capabilities in technology, reporting, high-quality data management, and analytics, and then prioritize needed investments.
Working with Outside Providers
In reviewing your in-house capabilities, you may have uncovered attractive investing strategies that are outside of your existing skill set. Hiring additional staff is difficult, and investing in technology required for specialty asset classes can be costly. In addition, it takes time to build and integrate a new investment function. As a result, many insurers are establishing a partnership with an external investment manager to enhance the potential of their portfolios.
If you decide to explore outside investment partners, there are several important steps you’ll need to take:
- Decide on the extent of the third-party relationship. Determine the nature of the solution being sought, which can range from single strategy to fully outsourced chief investment officer (OCIO), with hybrid solutions that are in between.
- Define the operating framework. Once you decide that an external investment manager is appropriate for your portfolio, the next step is to define the framework within which the provider will be selected and subsequently operate. The specifics will vary depending on each institution’s needs. Ask yourself:
- What are the specific functions for which the manager will be accountable?
- What are the performance expectations, benchmarks, and metrics to be used in evaluating performance?
- What are my requirements for reporting and communication?
- Confirm that the investment manager understands your business. Knowledge of the insurance industry and your business are critical components in a successful partnership. Does a third-party asset manager have experience in managing investments in the insurance industry? Does the manager understand your products? An external investment manager should have an understanding of the distribution strategies and potential claim liabilities, including frequency, severity, and duration.
- Assess the full range of a third-party manager’s contribution. Your investment provider may be able to provide valuable assistance in a number of areas, including governance, investment policy statement creation and monitoring, diversification, performance management oversight, performance measurement, reporting, and regulatory requirements. Since the ability of managers to offer help in these functions varies considerably, make sure you know all that an external manager can offer.
- Establish criteria for selecting a third-party investment provider and conduct due diligence. Define your expectations for an external investment manager and establish a due diligence process to understand the provider's:
- Organization, capabilities, investment philosophy and process, performance, risk monitoring, people, and reporting/communications process.
- Technology, cyber security, client privacy policies, and liability insurance limits.
- Ability to provide updates on economic and capital market outlook along with education to help you understand the risks and opportunities in the global investing environment.
- Proficiency in meeting the various and changing reporting requirements of the regulators and to understand how the strategies for which they are responsible fit within the overall scheme.
- Monitor performance against expectations. Track performance over time to ensure that expectations are being met. Understand performance attribution relative to the risk incurred. Can the insurance company and its investment managers meet your reporting demands? Is the portfolio operating within the established risk parameters? Having the systems in place to monitor is critical.
In summary, you do not have to go it alone. A high-quality investment provider can deliver valuable assistance in a number of areas, provide relief to internal finance and investment teams, and bring fresh ideas to the portfolio.
About PNC Institutional Asset Management’s Insurance Solutions Group
PNC Institutional Asset Management’s Insurance Solutions Group builds on PNC’s long-standing commitment to insurance companies. Our team has the experience to understand each client’s unique needs and the role that effective General Account management plays in contributing to an insurer’s financial success. In addition to providing investment management services, our group works with our partners across PNC to look at a client’s total picture and deliver a comprehensive, customized suite of financial services products and solutions.