14 Summer 2010 theInterpreter x www.iasa.org

feAture Story

Integrated-By-Design

Systems for monitoring, managing, and reporting on financial assets are mission-critical, financial assets are mission-critical, particularly in such a volatile investment environment. Yet, far too investment environment. Yet, far too many insurance companies today many insurance companies today rely on outdated legacy systems rely on outdated legacy systems that are expensive to maintain, offer that are expensive to maintain, offer limited portfolio visibility, do not limited portfolio visibility, do not effectively assess risk exposure in a effectively assess risk exposure in a timely fashion, and are heavily reliant timely fashion, and are heavily reliant on time-consuming, error-prone on time-consuming, error-prone manual reconciliation.

By COuRTy GATES

Why Merging Disparate Systems Could Be Troublesome For Investment Reporting

theInterpreter x www.iasa.org Summer 2010 15

Historically, insurance companies

have used a combination of

siloed point solutions and

spreadsheets which require layers

of middleware, custom coding,

and manual intervention that add cost and

complexity while also exposing the insurance

company to unnecessary risk. Insurance

companies today are seeking new ways to

add transparency into existing investment

portfolios by enhancing or replacing outdated

processes and systems used to monitor,

manage and report on investment assets.

“At many insurance companies,

investment management has historically

been treated as an afterthought,” said Bret

Myers, assistant treasurer for Group Health

Cooperative. “It has not had as much focus in

the past as a way of augmenting the bottom

line, but rather was kind of a complement to

core operating results.”

“In the past few years, there has been an

awakening among senior management and

boards at insurance companies in the way

that they view investment portfolios,” said

Myers. “In 2008, with the near-collapse of the

financial markets, suddenly there was a need

to be able to report on a real-time basis what

was going on with investment securities.”

Deb Smallwood, founder of SMA Strategy

Meets Action, an insurance analyst firm,

indicates insurance companies are investing

in business intelligence tools, external data,

and predictive analytics to help manage

investment portfolios with more precision

and effectiveness across compliance, reporting

and performance management.

“IT investment is shifting towards these

new technologies,” said Smallwood. “And

that is starting to raise the bar in terms of a

new set of required business capabilities for

investment management.”

Details gleaned from a 2009 study

conducted by the Economist Intelligence Unit

(EIU) reinforce this point.

“When insurers have adopted technology

to upgrade governance, risk and compliance

processes, the focus has been on reducing

costs and increasing efficiency, rather than

providing an integrated picture of risk to

support better decisions,” states the report by

Dan Armstrong, senior editor for the EIU.

“Companies have managed to be profitable

despite their dependence on manual processes,

but as the pace of business accelerates, the

speed and efficiency afforded by automation

becomes more important.”

For the investment management operation

at any insurance company, integrated

accounting, compliance, performance and

risk reporting as well as analytics constructed

on a foundation of aggregated and reconciled

tax lots is critical for monitoring investment

portfolios, making informed decisions, and

reporting to senior management.

Jim Krygier, assistant vice president for

The Warranty Group, cites the market events

of May 6, 2010, compared with those during

the beginning of the financial crisis in 2008 as

night and day for his company.

“In September 2008, we simply didn’t have

the operational bandwidth to immediately

determine our concentration of exposure in

any area of our portfolio,” said Krygier. “Of

course, it didn’t change the fact that the board

wanted to know immediately. Now, when

the market dips, as it did on May 6th, I log

on to our hosted solution, see exactly where

we stand and report to the board. That

level of immediacy in today’s market is

remarkably advantageous.”

Ultimately, as innovations in security,

bandwidth, and storage lead to increasing

acceptance for a hosted solution for

investment reporting, insurance companies

will increasingly migrate to systems that

provide such a significant, competitive

advantage over fragmented and manually-

merged investment portfolio tools. Still, cross-

functional buy-in to an integrated-by-design

solution which combines accounting and the

analytics required by investment management

can be elusive. Chief Investment Officers and

members of the investment team at many

insurance companies are actively looking

for hosted investment portfolio reporting

and analytics solutions to replace point

solutions, spreadsheets, manual processes, and

cumbersome database queries.

Deployment of a solution that replaces

existing accounting software and processes

can meet stiff resistance with the accounting

function where the primary objective is the

creation of monthly, quarterly and annual

financial reports and regulatory filings.

Because existing systems and processes

are getting the job done, the resistance is

understandable. From a senior management

perspective, however, having both accounting

“…as innovations in security, bandwidth, and storage lead to increasing acceptance for a hosted solution for investment reporting, insurance companies will increasingly migrate to systems that provide such a significant, competitive advantage over fragmented and manually merged investment portfolio tools.”

The Problem with Investment Portfolio Reporting - Manually-merged legacy systems present significant, operational challenges

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16 Summer 2010 theInterpreter x www.iasa.org

FEATuRE STORy

and investment management reporting

drawing from the same data foundation and

tying-out is vital.

The Warranty Group’s Krygier explains

there is a high-degree of incredulity and

mistrust among accounting divisions when

presented with the prospect of shifting over to

a new system. In short, change management is

a serious issue.

“Cumbersome as many legacy systems

are, over time they become part of the

department’s operating culture, given the

sheer volume of sweat equity invested in

making them workable,” said Krygier. “As

a result, accounting department heads are

extremely reluctant to accept when it’s time to

trade in the old system – sweat equity and all –

for a solution integrated-by-design that allows

for greater accuracy and transparency. Instead

of expending the usual effort needed to make

sure our data ties out across systems that do

not communicate effectively, we can allow our

hosted solution to provide timely data for us

and spend the time using that data to make

more informed investment decisions.”

Without integration of the accounting

and investment management reporting,

manual processes and spreadsheets and

their weaknesses, from a control perspective,

persist. One significant weakness is the labor

required to reconcile between systems. This

reduces confidence at the senior management

level and ties up resources that could be more

effectively deployed elsewhere.

Ultimately, chief investment officers and

investment managers need access to reporting

that provides timely, accurate actionable

information to monitor investments and

make informed decisions about opportunities

and risks. Likewise, the accounting team needs

to replace manual processes and spreadsheets

with automated tools to improve accuracy

and reduce the time and effort necessary to

reconcile information and generate financial

reports and regulatory filings.

Courty Gates is the CEO of Clearwater Analytics. He can be reached via email at courty@clearwateranalytics.com.

Problem Solved - An integrated-by-design investment portfolio reporting solution optimizes operational efficiencies