A Good Investment

Challenged by reduced returns, complex investment vehicles and stringent reporting requirements, insurers are deploying portfolio management systems to track, value and report on their investments.

Q: What are the key challenges insurers face in terms of improving their portfolio/investment management strategies and activities?

A: Doug Sheehan, Investment Conversions & Consulting: The biggest issues are compliance with regulatory issues. These issues are consuming most of the available resources and are being given priority over other business needs that are focused on economic returns. The next biggest issues are difficulties integrating a number of front-office, middle-office and back-office systems.

A: Seán Mooney, Guy Carpenter & Co.: Key challenges include addressing the issue of a flat yield curve. International players also face the challenge of managing foreign exchange exposures.

A: Ted Reed, SS&C: Interest rates have been declining over the past two to three years. Corporate bond yield spreads have been compressing as the global economies have prospered. These two trends have reduced portfolio book yields and have forced insurance companies to venture into new financial instruments in an attempt to increase book yields. Collateralized bond, debt and loan obligations offer higher portfolio yields but require more-sophisticated accounting systems to track, value and report on. Adding to the complexity, insurance companies are contributing to the rapid growth of derivatives by using interest rate swap and credit default contacts. Often, such instruments add leverage to a portfolio and therefore require more risk tracking capability as well.

Declining yields create another phenomenon driven by insurance accounting -- unrealized book gains. However, since interest rates are declining, there is a reluctance to realize those gains since the realized proceeds would be invested at lower yields, assuming no change in asset allocation. As interest rates rise, however, any portfolio sales generate book losses in the available-for-sale portion of the portfolio that may ultimately reduce portfolio management flexibility or require additions to loss reserves.

Q: What are some of the tools and technologies that can help insurers better manage, track, value and report on investments and financial performance?

A: Sheehan, Investment Conversions & Consulting: A wide variety of analytical tools are used to track investment performance. But Microsoft [Redmond, Wash.] Excel still is the most widely used tool, and the techniques used in spreadsheets are used for a variety of other forms of analysis in other departments. The most natural department where analytical tools could be borrowed from investments is asset liability management, which is a very large focus for many insurance companies today.

Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio