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.
Options in Oklahoma
The Oklahoma Option is up and running, with four qualified employers and three approved carriers as of July 1.
Scott Taylor, president of qualified employer Taylor & Sons Pipe & Steel, is a believer in the alternative structure. He expects opting out of the traditional workers’ comp system to not only save costs, but deliver better care for injured workers.
The Option “allows you to have a discourse with the employee instead of being taken out of that conversation,” Taylor said. “Under the workers’ comp system, once there’s an injury that’s documented and enters the system, as an employer, your hands are tied completely. You never have an idea what’s taking place. You’re just given decisions and expected to accept those decisions.”
By offering benefits outside of that system, he said, employers can sit down with their workers and figure out which doctors and facilities will best suit them. Greater control over their care, as well as requirements to immediately report injuries, will theoretically instill greater accountability in injured workers and speed return to work.
“The Option allows you to have a discourse with the employee instead of being taken out of that conversation.” — Scott Taylor, president, Taylor & Sons Pipe & Steel
Which benefits employers’ budgets as much as employees’ well-being and productivity.
“We’re probably looking at 20 to 25 percent cost savings,” said Taylor, who employs around 40 workers. “The type of doctors that were available in the system have abused that system for quite some time. Now our employees can go to different facilities that may be half the cost.”
The three other qualified employers are Brookhaven Hospital, Inc. and Alpha Home Healthcare Inc., both offering healthcare services, and Regis Corporation, a hair care franchise.
For now, though, the interest from many other employers is somewhat tentative. Because Oklahoma’s workers’ comp system – previously one of the country’s most expensive – was overhauled at the same time as the Option’s introduction, many employers will wait to see how the two new frameworks compare.
“Accomplishing workers’ compensation reform was a significant challenge for the legislature,” said James Mills, director of workers compensation for Oklahoma. His department is “busy educating the insurance industry, employers and all other interested parties in how to take part in the Option.”
“A lot of employers will wait a year or two to see what their numbers look like under the new workers’ comp system before deciding if they want to opt out,” said Mark Walls, VP of communications and strategic analysis for Safety National, whose Option policy was the first to win state approval . “They want to see what the new normal will be. It’s going to take a couple of years before you see opt-out gaining full traction in Oklahoma.”
Darlene Freeman, ECA division president at Great American Insurance Group, said she expects the number of submissions for Option policies to grow “substantially” as employers realize its benefits. To date, Great American Security Insurance Co. has received more than 70 submissions as well as daily inquiries from all company sizes.
“It’s going to take a couple of years before you see opt-out gaining full traction in Oklahoma.” — Mark Wall, vice president, communications and strategic analysis, Safety National
Now the second state to allow opting out of the workers’ compensation system, Oklahoma still requires employers using the alternative system to meet the minimum benefit standards set by traditional workers’ comp plans.
“That’s very different from Texas,” Walls said. “Under the Texas system, employers simply need to notify the state and their employees that they are opting out and they don’t have to provide any workers’ comp benefits,” though many do choose to provide coverage of some kind.
Safety National and the two other approved carriers, including Great American and OneBeacon Insurance Co., already offer alternative opt-out plans in Texas.
“There are several employers who opted out of workers’ comp in Texas that also do business in Oklahoma, so the thought is they’ll eventually consider opting out in Oklahoma, too,” Walls said.
Freeman echoed the prediction. “Many large national employers who non-subscribe in Texas will be among the first to elect the Option for their Oklahoma operations,” she said.
The increased employee accountability and better medical outcomes that Option advocates are counting on will also mean quicker claims, a boon to both employers and carriers.
“Our experience with Texas non-subscription has proven that when employers take some of the risk with a self-insured retention or deductible, the result is a safer workplace and overall reduction in losses,” Freeman said. “The resulting reduction in claims costs will allow employers to use their savings to grow their businesses, hire more employees and offer additional benefits.”
Claim disputes will still be adjudicated in the workers’ compensation court system rather than civil court, another key difference from Texas. This preserves exclusive remedy for employers and results in a “much more structured” opt-out system than the one established in Texas, according to Walls. Freeman also claims that immediate reporting requirements and better medical care will ultimately result in fewer fraudulent claims for those courts to handle.
5 & 5: Rewards and Risks of Cloud Computing
Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.
ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:
5 benefits of cloud computing
1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.
2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.
3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.
4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.
5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).
1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.
2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.
3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.
4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.
5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.
Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.
Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.
To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?