A decade of low interest rates combined with sky-high claims across a full spectrum of sectors means the push for better efficiency within the insurance sector is palpable.
A third unexpected element thrown into the mix has been the Covid-19 pandemic, which has highlighted the urgent need for insurers to upgrade how they operate.
But introducing tighter underwriting policies and hiking client premiums can only go so far – and many institutions are already reaching their limits. The next step, therefore, is for insurers to turn inwards and cast a critical eye over their treasury management operations to begin radically upgrading their outdated systems and make their assets work harder.
Managing outgoings
For property and casualty insurers, loss liability is the largest item on a balance sheet. But while this aspect of business may be unavoidable, it can be managed better.
“Having an accurate estimate of the loss liability, and understanding the uncertainty surrounding the estimate, is a business imperative,” according to Christina Gwilliam, global product leader for P&C reserving at Willis Towers Watson (WTW).
However, she warns that just knowing the amount is not enough for an insurer looking to tighten up its operations.
“It is also essential to understand the timing of payments,” she says. “Reserving actuarial teams should provide chief financial officers with estimates of the amount and timing of expected loss payments, as well as articulating the confidence in each estimate.”
Profiling what is likely to be needed, and when, should help enable treasury teams to optimise cash flows and alleviate the need to hold inefficient rainy-day buffers.
Additionally, with upgraded systems, these teams no longer have to rely on spreadsheets, stagnant, historical data bundles or even good old-fashioned gut instinct to figure out the amount of powder they need to keep dry.
“Technology can enable various teams to do more and do it faster,” says Gwilliam. “Reserving teams are [increasingly] using specialist actuarial software to estimate liabilities and assess the variability in the estimates.”
WTW is among an ever-broadening range of companies that are creating and launching sophisticated tech solutions for insurers that communicate seamlessly between different departments and can be tailored to each business’s specific needs.
Yet, for some, advent of real-time treasury has been viewed as an additional operational risk, primarily as payments can occur every minute, according to Claus Pahlke, global segment lead and EMEA head of non-bank financial institutions at Deutsche Bank.
“The migration, however, from batch-based processing with cut-off times, respective transaction peaks and lengthy settlement periods to real-time processing will reduce notional amounts and require less liquidity in the system,” he says. In other words, it will actually reduce operational risks.
“More pro-active currency management embedded into forecasting and hedging strategies are expected to generate business value in treasury by aligning risk and accounting functions with treasury strategies,” says Pahlke. “Additionally, systems integration via APIs and process automation using cloud technology will drive further innovation.”
Many of these newly emerging products and solutions can also help organisations operate in other areas of their business more efficiently, too, “from triaging incoming claims to directing them to the appropriately experienced adjuster, to providing indicators of potential fraud on claim notices”, says Gwilliam.
Spotting fraud as it comes through the door is a lot easier than trying to sift it out of the system.
Software that automates repetitive tasks has also been a recent trend, according to Gwilliam, as it allows businesses to redeploy expensive resources to focus on activities that add more value.
“Companies trying to manage the critical reserving process with spreadsheets and VBA [visual basic for applications] macros are at a competitive disadvantage and at risk of errors and governance challenges,” she says.
Pahlke agrees, citing the support available from banks and other providers through fully digitised processes, but adds that “insurers themselves are developing solutions to detect fraudulent claims by various digital means”.
Maximising incomings
On the other side of the equation, insurers are coming under increasing pressure to sweat their assets harder to bring in useful returns. Aside from the general investment pool, which can be locked up for years targeting significant returns, day-to-day cash management is a key area for optimisation, too.
“Low- to negative-yielding liquidity positions have made it even more important to have tight control on liquidity positions across any insurance group,” says Pahlke. “While unallocated cash was an inefficiency in the past, the low and negative interest rates and the ever-tightening regulatory frameworks cause those positions to turn into cost drivers, which therefore require attention and active management.”
Yet for many insurers, this aspect of their business continues to be neglected, with deposit accounts still favoured across much of the industry.
However, with interest rates at rock bottom – and in some cases sliding negative – cash on deposit is an unattractive option. Instead, short- and medium-term funds that hold liquid, high-quality debt instruments are a key way to make a return while keeping assets accessible.
For Heneg Parthenay, head of insurance at Insight Investment, these funds not only enable insurers to make returns in an environment “where every basis point matters”, but sees their holdings diversified away from just one or two main counterparty banks or other lenders.
Unlike in other areas of investment, there is little room for innovation in money market funds. Yet Insight and other institutional asset managers have created products that offer a range of diversification, duration and liquidity options for insurers.
This evolution of risk management techniques should be attractive to CFOs, too.
Parthenay also recommends insurers establish a “liquidity ladder” that can help manage assets in line with specific, forecasted cash flows.
“Looking at the cash flows needed over a whole year, insurers can split off assets needed later into longer-term money market funds, which have offered a marginally higher yield, while keeping shorter-term cash into more liquid options,” he says.
This approach means forecasting does not have to be 100% accurate and can allow assets to earn vital extra returns, while treasury teams keep a careful watch and can move back to more liquid funds needed.
As a new digital dawn arrives, there is innovation coming.
“New investment instruments, including tokenisation, and the emergence of digital currencies are expected to support treasury in its effort to deliver tangible value to the entire insurance group,” says Pahlke.
If the business of insurance was already evolving before the arrival of a world-shifting pandemic, CFOs, treasurers and their teams can now grab the opportunity that change brings to get ahead.
