Insurance Asset Growth Lags
Global insurance assets under management are growing — but not nearly as much as they could be, according to the Boston Consulting Group.
One key problem, though not the only one, is that insurers tend to under-invest in information technology, securities processing and other operations integral to asset management, according to BCG.
Insurance company assets comprise nearly 20 percent of the $68.7 trillion in total global assets under management, as recorded by BCG last year.
Insurers’ total assets under management (AUM) reached $13 trillion in 2013. Yet, their AUM growth of 7 percent in 2013 was far lower than the overall average 13 percent increase in global AUM.
The fact that global insurers have lagged behind their asset-management peers in operations and information technology capabilities is something of a Catch-22, said Achim Schwetlick, a BCG partner and managing director in New York.
“The lower growth has likely contributed to the under-investment, not the other way around,” he said.
But clearly, this is an area that needs to be addressed, he said.
Between 2012 and 2013, insurance asset managers reduced their operations and IT spending by 4 percent per unit of AUM, said Schwetlick, who is a member of BCG’s insurance practice. In contrast, the broader asset-management industry increased that spending by 3 percent.
The serious expense reductions required by the “meager years” during and after the financial crisis prevented increased investments, he said.
“Now that we’re getting into growth territory again and expense pressure has mitigated, we think this is a good time to break that pattern,” Schwetlick said.
In addition, whereas most insurers have outsourced asset management in alternative asset classes, the vast majority of insurers still manage most of their assets in-house, he said.
The newly released BCG report, entitled “Steering the Course To Growth,”also pointed to the “large proportion of fixed-income assets” held in insurance company portfolios as a reason they “did not benefit as much from the global surge in equity markets.”
Insurers’ “exposure to high-growth specialties was similarly limited,” it said.
Regulatory and Organizational Inefficiencies
That may be difficult to overcome, said Schwetlick, given regulatory constraints preventing insurance companies from investing more aggressively.
This is particularly true in the United States, he said, although even European insurers tend to have no more than 10 percent of their assets invested in equities. In the U.S., equity investment is closer to 1 percent, said Schwetlick.
Organizational impediments have helped to sustain inefficiencies related to asset management, according to the BCG report.
The inefficiencies include regional fragmentation of assets, so that the asset managers of most insurers operate in regional silos as well as asset class silos, exacerbating fragmentation and complexity.
Insurers should move to a more global model to address those issues, said Schwetlick.
“You really want to have processes that are similar across the globe,” he said, that are related to both investment management and access to information about insurance company loss exposure.
Third-Party Management Benefits
The good news, finally, is that many insurers have benefited from third-party asset management over the past several years.
“While insurers’ asset managers have not historically focused on profitability and growth, they are tempted by the high returns on equity of third-party management,” according to the BCG report.
“Some managers have built this business to more than a third of their activity, and, in doing so, have invested and grown stronger commercially,” the report stated.
“As a result, they have achieved higher revenue margins and profits — averaging 25 basis points of revenues and 39 percent profitability, compared with 12 basis points and 26 percent, respectively, for mostly captive managers that focus predominantly on the insurer’s general account.
Leaders in this area include Allianz, AXA, and Prudential, said Schwetlick.
Quantifying Supply Chain Risks
Would it surprise you to learn that of 130 countries worldwide, the most favorable location for supply-chain exposures is Norway?
The Scandinavian country might not be a risk specialist’s first guess about supply chain conditions throughout the world, but that is indeed the case, said Steve Zenofsky, FM Global assistant vice president and spokesperson.
Coming in behind Norway in terms of affording favorable supply-chain factors were Switzerland and Canada. Most challenging areas for risk managers? Kyrgyzstan, Venezuela and the Dominican Republic.
The rankings are according to FM Global’s new, free online Global Resilience Index, which assesses conditions in 130 nations, and analyzes such factors as corruption, political risk, local infrastructure, risk of natural hazards, availability and price of oil, and quality of local suppliers.
George Haitsch, executive vice president and practice leader of Willis Global Solutions, said the Index is unique in offering free access to a tool that addresses factors specifically related to supply chain risk hazards.
For its part, he said, Willis offers clients an online tool called Atlas, which allows them to track natural catastrophes worldwide in real time.
“That’s the technology we have been working on,” said Haitsch, noting that natural-disaster risk and supply-chain risk have become increasingly intertwined.
Torolf Hamm, executive director in Willis’ catastrophe risk management practice, said in a blog post earlier this year that businesses are “increasingly keen to identify which key parts of the supply chain could be affected by the same natural hazard event and what risk mitigation options are available to reduce this exposure.”
Eric Jones, assistant vice president for Business Risk Consulting at FM Global, said the “real power with this tool is getting our clients to start thinking about the risks in their supply chain from a physical risk standpoint.”
“Using the index, risk specialists can get the attention of the C-suite and increase their organizational commitment from a time and resource standpoint,” he said.
The Index is designed to permit users to search for “core resilience drivers” impacting supply-chain risks, to learn which countries have the highest and lowest scores.
In drilling down for political risk climate, Switzerland, Finland, and New Zealand, for example, ranked highest.
For natural-hazard risk management, Ireland, Portugal and Singapore ranked highest, while Costa Rica, Israel, and the United States ranked highest for fire risk management.
The tool also displays a color-coded map showing which parts of the world are most and least risky in terms of supply chain factors from 2011 through 2014.
Growing Temp Workforce Faces Highest Risks
True or false: Temporary workers are less prone to on-the-job injury than internal employees.
The answer, of course, is absolutely “false.”
The truth is that temporary workers may in fact perform more dangerous jobs than other employees; nonetheless temporary workers tend to get short shrift when it comes to learning about on-the-job safety, according to the Occupational Safety and Health Administration (OSHA).
Meanwhile, the temporary worker industry has grown by leaps and bounds — growing 125 percent since 1990, OSHA told Risk and Insurance.
A total of 861,000 temporary jobs have been added to the U.S. economy since August 2009 and nearly 10 million people work in temporary jobs each year, OSHA reported.
In the past year alone, the number of temporary jobs increased by nearly 10 percent. And in March 2014, the economy added 28,500 temporary jobs — 15 percent of all job gains that month.
Thus, employers of all stripes — temporary staffing firms and their clients alike, need to shore up their efforts to ensure that adequate safety and health protections — including training — are in place for their temps.
OSHA inked an alliance with the American Staffing Association (ASA) in late May, in recognition of that fact.
As part of the alliance, OSHA and the ASA committed to work together to further protect temporary employees from workplace hazards.
“Through this alliance with ASA, we will increase outreach to staffing firms and host employers and provide information and education that is vital to protecting temporary workers,” said David Michaels, assistant secretary of labor for occupational safety and health, in an ASA announcement of the initiative.
Occupational injuries and illnesses cost American businesses more than $53 billion a year — more than $1 billion a week — in workers’ compensation costs alone.
The agreement reflects “a growing body of research showing that temporary workers are at increased risk of workplace injury,” said an OSHA spokesperson. “Often temporary workers are new to a jobsite several times a year, and are not provided required safety training,” OSHA stated.
Stephen Dwyer, general counsel for the ASA, noted in a recent interview that “Under the law, staffing firm clients must treat temporary employers the same as they do regular, internal employees in terms of workplace training, policies and procedures.
“Whether someone is temporary or not doesn’t make a difference under OSHA,” he emphasized.
In many cases, in fact, temporary workers’ injuries are more pronounced. Last year, OSHA began receiving a series of reports about temporary workers suffering fatal injuries — many during their first days on the job.
“OSHA has known for decades that [all] workers who start a new job are at greater risk of injury,” said OSHA’s spokesperson. “New workers are often not adequately trained on the potential hazards at a new job site and the measures they can take to protect themselves.
“Temporary workers often perform the most dangerous jobs, have limited English proficiency and receive little safety training and instruction on protective measures,” said the administration spokesperson.
OSHA believes heightened temp worker safety will improve employers’ profitability, as well, since occupational injuries and illnesses cost American businesses more than $53 billion a year — more than $1 billion a week — in workers’ compensation costs alone.
“By identifying and controlling workplace risks and training workers, employers can reduce worker injuries and illnesses and the costs resulting from them, such as workers’ compensation rates, turnover and absenteeism. These costs can double when you add the many indirect costs to employers — such as the costs of down time for other employees as a result of an injury, investigations, claims adjustment, legal fees, and associated property damage,” the administration spokesperson stated.
Finally, OSHA hopes the new alliance with the ASA will help both host employers and staffing agencies to realize they each have roles in complying with workplace health and safety requirements and that they share responsibility for ensuring worker safety and health.
“Training — which must be conducted in a language and manner understandable to the temporary worker — will enable temporary workers to understand the hazards of their jobs and what they can do to protect themselves while working,” OSHA said.