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.
The Government’s Backing Out of TRIA Harms Us All
Insuring risk is a societal and economic necessity. The goal of insurance is to spread risk across a large enough pool of people or businesses with similar risk profiles as to make the costs and variability manageable.
No one entity can reserve for or pay for catastrophic events such as the loss of a home or business. So we all pay yearly in the form of premiums that go into a pool to protect those struck by catastrophe.
Risk is measured in two major categories 1) the probability of an event and 2) the impact if an event happens.
The nature of terrorism is that single actors or small groups can greatly impact both categories, i.e. Timothy McVeigh and a truck load of fertilizer. There are many of us and many ways other humans can harm life and property.
If the government won’t protect us from terrorism and it won’t help insure the results of terrorism, then we have an unprotected economy.
Terrorism is also something that tends to hurt people who aren’t traditionally in high risk jobs, but just happen to be in the wrong place at the wrong time.
If you think back to 9/11 in New York City, or the Oklahoma City bombing, those both took the lives of many people in otherwise low-risk professional classifications.
It is impossible to predict where in our country the next strike may occur, therefore we need to spread the risk pool to as large a group as possible; which means all of the tax base of the country, which is our government. That is what we do with flood insurance, that is why we need to do it with terrorism insurance.
If the government won’t protect us from terrorism and it won’t help insure the results of terrorism, then we have an unprotected economy. The risk of a terror event is too big for private insurers to cover and would be too expensive for business to afford the premiums.
Without TRIA and without protection from terrorism we will have a dysfunctional economy. It is the duty of the government to provide an environment where our economy can flourish. Until we have responsible government we can expect an impeded economic outcome.
The Federal Government has a responsibility to provide something like TRIA. These terroristic acts aren’t aimed at any one person, company or even a city.
Terrorists are using these heinous, violent acts to attack our nation and our government. Our government was created with the security of our nation as its primary responsibility. TRIA needs to be reinstated so that our government can live up to that responsibility.
Read all of Jerry Poole’s Risk Insider contributions.
The Promise of Technology
The field of workers’ compensation claims management seems ideally suited as a proving place for the power of technology.
Predictive analytics in the hands of pharmacy and medical management experts can give claims managers the data they need to intervene in troublesome claims. Wearables and other mobile technologies have the potential to give healthcare providers “real-time” reports on the medical condition of injured workers.
Never before have the goals of quick turnaround and transparency in managing claims appeared so tantalizingly achievable.
In the effort to learn more about technology’s potential, in September, Risk & Insurance® partnered with Duluth, Ga.-based Healthcare Solutions to convene an information technology executive roundtable in Philadelphia.
The goal of the roundtable was to explore technology’s promise and to gauge how advancements are serving the industry’s ultimate purpose, getting injured workers safely back to work.
Big Data, Transparency and the Economies of Scale
Integration is a word often heard in connection with workers’ compensation claims management. On one hand, it refers to industry consolidation, as investors and larger service providers seek to combine a host of services through mergers and acquisitions.
In another way, integration applies to workers’ compensation data management. As companies merge, technology is allowing previously siloed stores of data to be combined. Access to these new supersets of data, which technology professionals like to call “Big Data,” present a host of opportunities for payers and service providers.
Through accessible exchange systems that give both providers and payers better access to the internal processes of vendors, a service provider can show the payer the status of the claim across a much broader spectrum of services.
“One of the things I see with all of this data starting to exchange is the ability to use analytics to predict outcomes, and to implement workflows to intervene.”
–Matthew Landon, Vice President of Analytics, Bunch CareSolutions.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes,” said roundtable participant Chuck Cavaness, chief information officer for Healthcare Solutions.
Integration across multiple product lines also produces economies of scale for the payer, he said.
Big Data, according to the roundtable participants, also provides claims managers an unparalleled perspective on the cases they manage.
“One of the things that excites us as more data is exchanged is the ability to use analytics to predict outcomes, and to implement workflows to intervene,” said roundtable participant Matthew Landon, vice president of analytics with Lakeland, Fla.-based Bunch CareSolutions, A Xerox Company.
Philadelphia roundtable participant Mike Cwynar, vice president of Irvine, Calif.-based Mitchell International, agrees with Landon.
“We are utilizing technology to consolidate all of the data, to automate as many tasks as we can, and to provide exception-based processing to flag unusual activity where claims professionals can add value,” Cwynar said.
Technology is also enabling the claims management industry to have more productive interactions with medical providers, long considered one of the Holy Grails of better case management.
Philadelphia roundtable participant Jerry Poole, president and CEO of Malvern, Pa-based claims management company Acrometis, said more uniform and accessible information exchange systems are giving medical providers access to see how bills are moving through the claims manager’s process.
“The technology is enabling providers to call in or to visit a portal to figure out what’s happening in the process,” Poole said.
Another area where technology is moving the industry forward, according to the Philadelphia technology roundtable participants, is mobile technology, which is being used to support adjustors and case managers and is also contributing to quicker return to work and lower costs for payers.
The ability to take a digital tablet to a meeting with an injured worker or a health care provider is allowing case managers to enter data and give feedback on a patient’s condition in real time.
“Our field-based case managers have mobile connectivity to our claims systems that they use while they’re out of the office attending doctor’s appointments, and can enter the data right there into the system, so they’re not having to wait until they are back at the office to enter critical clinical documentation,” said Landon.
Injured workers that use social media, e-mail and the texting function on their mobile phones are staying in better touch with those that are charged with insuring that they are in compliance with their treatment plans.
Wearable devices that provide in-the-moment information about an injured workers’ condition have the potential to recreate what is known in aviation as the “black box,” a device that will record and store the precise physical state of an employee when they were injured. Such a device could also monitor their recovery process.
But as with many technologies, worker and patient privacy also needs to be observed.
“At the end of the day, we need to make sure that we approach technology enhancement that demonstrates value to the client, while ensuring patient advocacy,” Landon said.
As payers and claims managers set out to harness the power of computing in assessing an injured worker’s condition and response to treatment, the cycle of investment in companies that serve the workers’ compensation space is currently playing a significant role.
The trend of private equity investing in companies that can establish one-stop shopping for such services as medical case management, bill review, pharmacy benefit management and fraud forensics has huge potential.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes.”
— Chuck Cavaness, Chief Information Officer, Healthcare Solutions.
The challenge now facing the industry, one the information technology roundtable participants are confident it can meet, is integrating those systems. But doing so won’t happen overnight.
“There’s a lot of specialization in the industry today,” said Jerry Poole of Acrometis.
Years ago there was a PT network. Now there’s a surgical implant guy, there’s specialized negotiations, there’s special investigations, said Poole.
The various data needs to be integrated into an overall data set to be used by the carriers to help lower the cost of risk.
Securing Sensitive Information
Long before hackers turned the cyber defenses of major national retailers inside out, claims management professionals have focused increased attention on the protection of data shared across multiple partners.
Information security safeguards are changing and apply to what technology pros refer to “data at rest,” data that is stored on a particular company’s servers, and “data in flight,” data that is transferred from one user to another.
Mitchell’s Cwynar said carriers want certification that every company their data is being sent to needs to have that information and that both data at rest and data in flight is encrypted.
The roundtable participants agreed that the industry is in a conundrum. Carriers want more help in predictive analytics but are less willing to share the data needed to make those predictions.
And as crucial as avoiding cyber exposures and the corresponding reputational damage is for large, multinational corporations, it is even more acute for smaller companies in the workers’ compensation industry.
Healthcare Solutions’ Cavaness said the millions in loss notification and credit monitoring costs that impact a Target or a Home Depot in the case of a large data theft would devastate many a workers’ compensation service vendor.
“They’d be done in a minute,” Cavaness said.
The barriers to entry in this space are higher now than ever before, continued Cavaness, and companies wishing to do business with large carriers have the burden of proving that its security standards are uncompromising.
Workers’ compensation risk management in the United States is by its very nature, complex and demanding. But keep in mind that those charged with managing that risk get better results year after year.
Technology has a proven capability to iron out the system’s inherent complications and take its more mundane tasks off of the shoulders of case adjustors.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.