Dietmar Roessler examines what internationally operating insurers can gain
For many international insurance companies, choosing a global custodian to cover their needs seems to resemble the hunt for the Yeti. Yet they are faced with managing the data flow and operational challenges in international insurance activities, as well as handling the investment management challenges of their operations in different parts of the world.
In their desire to support an international growth strategy, insurance companies are in danger of becoming trapped between their often-decentralised organisational structure and their requirement to obtain consistent, consolidatable data as basis for their global risk management or central asset allocation.
Insurance companies in general, and life companies in particular, trying to diversify their revenues internationally, face the challenge of extensive local regulations. These regulations tend to cover issues as far ranging as asset/liability matching; asset allocation, choice of custodian, accounting requirements, regulatory reporting requirements among many others.
These requirements have forced many insurers to develop decentralised operations, with investment activities spread across a multitude of local entities. A jungle of local systems tries to cope with local regulations, asset management and custodial activities.
In addition, the different accounting requirements often lead to the use of numerous accounting systems across the company.
Investment management activities vary from long term investments into the local government bond market in some subsidiaries to highly sophisticated international asset management operations in head office and the main insurance markets, covering all types of instruments making active use of derivatives. The systems to support these widely differing activities range from spreadsheets to bespoke programs to support specific products and the use of sophisticated asset management systems.
Asset management is frequently handled by using a combination of in-house management and third party asset managers, which are used for special mandates or for smaller entities which lack critical mass.
The choice of custodians is often restricted by regulations stipulating that insurance companies use domestically regulated custodians. In addition to choosing a local custodian, reinsurance companies are in many of the markets where they underwrite primary insurance risk, frequently required to maintain ‘blocked ’ or trustee accounts. Classic custodian decision criteria, such as asset protection, credit risk of custodian and service quality , are often secondary to the need to cope with these local requirements.
The scope of these rules has led many organisations to adopt highly decentralised structures and decision processes. The performance of asset managers is assessed on multiple internal and external systems. Supply management strategies are non-existent or non-enforceable. Consequently, conditions reflect the local company’s local purchasing power as opposed to the group’s consolidated purchasing muscle. Legal contracts with suppliers very often lack any standardisation and expose the company to a significant documentation and legal risk.
In this environment, a centralised risk management is a lone rider. Data coming in with significant delay from the wide range of custodians is typically consolidated manually into a centralised accounting system in order to allow consolidation on the liability side. Performance measurement tends to be done on a yearly basis.
Increasingly, local insurance companies’ performance is becoming critical for a company’s success. To achieve this, companies need to find a solution, which allows them to obtain:
q High frequency of data consolidation;
q High data consistency;
q System interfaces, into risk management and accounting systems, for example;
q Standardised performance measurement
q Compliance monitoring of internal and external asset managers and local investment regulations;
q Support of local regulatory requirements;
q Concentration of purchasing power.
In order to cope with the requirement for professional risk and portfolio management on one side and local requirements on the other, insurance companies frequently pursue two main options. Those insurers, which have succeeded in introducing a centralised asset management structure, tend to appoint a new global custodian for all those markets where regulatory requirements permit the custodian to operate on behalf of the insurance company. Insurance entities in the remaining market continue to use local providers. Others, which try to main a decentralised company structure or whose political realities do not allow a centralised approach, reduce the custodians to very few providers with similar interfacing capabilities.
The complexity of the structure increases, when global custodians use third-party sub-custodians with different operational platforms.
The situation can be improved by using a custodian with a large proprietary sub-custodian network utilising a standard system set. Citibank, as a local custodian, has recently implemented solutions for international insurance clients allowing more than 20 entities to choose among seven standardised global custody centres and to combine them freely with the use of any its 51 proprietary sub-custodians.
In this case, the standardisation at sub-custody level allows the client to combine freely global and local custody requirements without the downside of additional system interfacing and loss of data consistency. Independent of the number of legal and operational relationships, all data flows can be managed over a single interface. These solutions support organisations with decentralised structures or those with significant local regulatory requirements. The standardisation across sub-custodians and global custody allows real-time feeds, central risk or asset management and accounting systems. In addition, it allows an equitable comparison of performance for the entire insurance group
Dietmar Roessler is vice president with Citibank Worldwide Securities Services in Zurich