February 28, 2014

In the aftermath of the 2008 economic downturn, asset managers throughout the economy are struggling with incoming regulatory and financial challenges. Those in the insurance industry fear their current systems will not be able to handle the pressure.

Northern Trust recently conducted a survey among 250 senior investment managers at global insurance companies in the U.S. and Europe to gauge their concerns about investment operations management. While two-thirds claimed their systems can adequately handle current regulations, over 70% admitted they are concerned – or unsure whether they should be concerned – about the future.

“Globally, there is an increase in regulation in insurance companies, both current and proposed, that is driving complexity in an already complex business,” says David Sullivan, SVP and North American head of insurance at Northern Trust.

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The increase in regulation, greater variation in investment classes and styles, and aging systems are all driving uncertainty among insurers, Sullivan explains. Less than 30% are confident that their investment operations infrastructure is sufficient to meet future challenges.

Insurers in the U.S. will face increased complexity from the Dodd-Frank Act while those in Europe comply with the Solvency II directive. Both regulations will heighten insurers’ demands for products that help manage risk, report on investment performance and adhere to compliance requirements. While these mandates are still being understood and rolled out, says Sullivan, they are both extensive regulatory bodies that are poised to significantly impact the industry.

These regulations will test the limits of legacy systems. Although this is not a current problem, insurers’ operations will eventually require new infrastructure to manage and understand investment data. This is likely to strain company resources.

Regulatory challenges aside, insurers’ outdated systems also face the threat of a retiring workforce. Employees who are conversant on those systems have been managing them for a while, Sullivan explains, but fewer will be around in the future.

According to the study, 39% of respondents expect 11% to 25% of their workforce to retire within five years. One-third anticipates 5% to 10% of their staff to retire during the same period.

Survey responses indicate that the number of insurers considering outsourcing operations is expected to decline from 14% to 10% over the next five years. Given the impending regulatory pressures and predicted lack of talent, they should reconsider.

Insurers should evaluate which functions are core to operations and which can be outsourced. In most cases, insurers who think they can face technological challenges on their own should consider working with outside vendors to upgrade their systems and decrease costs. After all, college graduates learning the latest programming systems are unlikely to apply for jobs at companies using outdated software.

Tom Secaur, COO at Citisoft, advises insurers to act soon. While they currently have the luxury to choose whether they prefer internal or external systems, their time is limited. The longer they wait, he states in the report, the fewer options they will have.

[To hear about how insurance companies and financial firms are managing their complex data architectures, attend the Future of the Financial Services Data Center panel at Interop 2014 in Las Vegas, March 31-April 4.

Kelly is an associate editor for Insurance & Technology. Prior to joining InformationWeek Financial Services, she was a staff writer for InformationWeek and InformationWeek Education. Kelly has also written for trade ...