Modern, digitalized investment management relies on targeted, consistent decisions using innovative tools to address the current challenges on the capital market and exploit the efficiency potential of digitalization.
The market environment for insurance has changed dramatically in recent years and is characterized by a prolonged period of low interest rates, with negative interest rates on long-term government bonds that are regarded as safe. As a result, the current interest rate of life insurers is continuously falling. It is therefore not surprising that low interest rates are seen as the biggest challenge for investment, even ahead of geopolitical tensions. The coronavirus crisis has further increased this pressure on earnings and reduced average solvency ratios within the sector, particularly in the area of life insurance.
In view of these circumstances, insurance policies are increasingly deviating from traditional conservative investments with large holdings in government bonds and are investing more in asset classes that offer potential returns and contribute to portfolio diversification. At the same time, asset liability management is looking for solutions to ensure that (life) insurance policies are secure in the long term – with corresponding impetus for investment, among other things.
Meanwhile, the topic of sustainability is also changing the way insurance companies invest. Alongside returns, security and liquidity, this is the fourth pillar of portfolio quality and as such must be integrated into the management approach. Further impetus comes from digitalization, which provides additional tools for research, reveals automation potential and thus allows for more efficient overall management.
Key questions for the further development of investment management
In view of these challenges and sources of impetus, there are five guiding questions that we must ask in relation to the further development of investment management:
1. What elements should be included in a future-oriented investment strategy? 2. How can management be made more efficient, transparent and consistent? 3. How can sustainability be integrated into management? 4. What are the requirements for digital processes and modern governance? 5. Which data and IT architectures best support digital management?
These guiding questions can be used to forge a path to advanced, digitalized investment management. Typically, our customers raise the topics listed below.
Future-oriented investment strategy
In order to increase potential returns, new asset classes are selected specifically on the basis of their profiles and then gradually added to the investment portfolio in accordance with the defined investment strategy. Examples include (increased) investments in private equity, infrastructure, real estate and private debt. Based on the company-wide sustainability strategy, the investment strategy is also expanded and further KPIs are defined.
Efficient, transparent and consistent management
The new asset classes must be integrated into income, risk and liquidity management, which requires specific knowledge of each respective asset class. In the case of increased investments in existing asset classes, the existing processes, structures and management methods, for example in (credit) risk management, must be checked for appropriateness.
Strategic asset allocation (SAA) defines a clear positioning in the expected economic environment. Centrally defined parameters and impetus from asset liability management are incorporated into this element. In some cases, tactical asset allocation is also optimized for short-term positioning.
The SAA is converted into an integrated planning solution that takes into account all management-relevant perspectives (statutory, economic, regulatory, liquidity). Together with the SAA and additional tactical ranges if necessary, the top KPIs determined are included in the mandating of the company’s own front office, internal or external asset managers.
This planning solution is related to the capital management framework, which combines profit and risk management as a link between risk strategy and capital investment. The risk capital allocation based on risk-adjusted performance indicators is used to define central requirements for investments.
The systematic collection and evaluation of management-relevant information with the help of business intelligence relieves the burden on the front and middle offices. This information is prepared in a way that is appropriate for the recipient, by means of high-quality management reporting.
Integration of sustainability
From an investment management perspective, sustainability is a component of the portfolio quality and so is holistically integrated into all relevant management processes and models based on the extended investment strategy. In the front office, ESG criteria serve as a helpful signal for fund and individual stock selection.
Modern governance and processes
Investment management will in future be supported by a role-based organization in the CFO or asset management department, which is geared towards efficiency, digitalization and business support. It will also be possible to accelerate repetitive, transactional activities through process automation.
This shows that, particularly in the area of front offices, there are various possible approaches to using one’s own high level of professionalization via insourcing as an additional source of income, or to benefit from this via outsourcing. Additionally there is potential for automation, especially in the management of liquid assets, which allows for a focus on the active management of illiquid assets and AI-supported research.
Future-proof data and IT architecture
Digital platforms integrate internal and external data (including ESG-related data) and form the basis for data analytics in order to identify trends and anticipate developments on the capital market. Certain software solutions and data providers are selected specifically for investment management.
Modern, digitalized investment management
Addressing the aforementioned topics results in advanced, digitalized investment management. This brings the benefit of faster investment management and improved consistency in the decision-making bases generated, while the integration of relevant management perspectives and operationalization of the investment strategy also promote rigor in management. Modern governance, automated processes and a future-proof data and IT architecture offer optimal support for investment management. These enhancements enable new earnings potential to be more effectively identified, which can alleviate the pressure on earnings mentioned above.
Have we got your attention?
We would be happy to enter into a professional exchange with you and examine the possibilities for the further development of your investment management together. We can work together to design a concrete target structure and implement it in collaboration with you. We look forward to speaking with you!