One of the primary goals of regulatory efforts in the wake of the financial crisis has been to encourage financial companies and their boards of directors to better understand, communicate and strategize about risk. During the crisis, many companies failed to understand the risks in their investment portfolios, and therefore neglected to communicate these risks to analysts, policyholders and shareholders. A better path would have been to develop a sound strategy for risk – that is, how much risk, what kind of risk, when and where to take risk – and fully communicate that strategy to interested parties.
Insurance executives are under more pressure than ever before to communicate and comply with more stringent regulations. To better understand, strategize and communicate about risk, insurers need visibility and transparency, leading to insight and better business decisions.
[Previously from Vercellino: Overcoming compliance challenges with BI]
Visibility across Investment Portfolios
Gaining visibility into risks within the investment portfolio is just the first step for insurance investment managers and CFOs. Allocation statistics such as credit quality breakdowns and international exposures are critical to understanding the composition of your portfolio, as well as comparing allocations to common benchmarks and customized, board-recommended standards. For larger companies, the task is more arduous: multiple separate accounts and numerous investment managers with specialized mandates require more processing power and sophisticated reporting tools.
Transparency within Portfolios
To truly understand risk, investment managers must go deeper than portfolio allocations to look at risks at the security level. Today, they must understand and inquire about correlations, cross-correlations, issuer and counterparty risk, among other known and unknown factors. While simple statistics will show the international debt allocation in the portfolio, deeper insight comes from knowing how much is in emerging market countries, which securities are issued in US dollars versus local currencies or are backed by developed countries, and how the economic, trade and tax policies of each country impacts its credit worthiness. Investment managers who cannot outline these risks, issue by issue, security by security, place both their careers and their firms at risk.
Insight Leads to Risk Strategy
With better visibility across portfolios and transparency into portfolios, managers can develop and articulate an enterprise risk strategy. A risk strategy involves not just identifying risk, but describing when and how managers might take additional risk, how much risk is acceptable, under what conditions additional risk may be added, and when managers would take risk off the table. Now we see how insurers can see risk as a two-way street – not something to avoid, but rather something to understand, quantify, manage and capitalize on.
By transforming raw data into readily consumable pieces of information with dashboards, scorecards and performance filters, business intelligence tools can help insurance portfolio managers and executives bring clarity to chaos by converting a tsunami of data into a wealth of clear, concise information that support your risk strategy.
About the author: John E. Vercellino, AAM, AIAF, is vice president of product management for SunGard's iWorks Financials solutions. He holds the Associate of Automation Management and Associate of Insurance Accounting and Finance designations from the Insurance Institute of America, and is currently an Expert Level candidate in the Certificate in Investment Performance Measurement (CIPM) program of the CFA Institute.