Technology – A key investment risk facing Insurers as they look to modernise their operating models

In 2023, PwC and the Centre for the Study of Financial Innovation (CSFI) released their Insurance Banana Skins Report, scoring the top risks facing today’s Insurance Industry. We are reviewing five of these risks that we see our clients concerned about. This article is the second in the series. Read our other’s here: Regulation, Interest Rates, Climate Change, AI.

Occupying fourth place and a common chart-topper is Technology Risk. As firms continue to invest in modernising their operating models, replacing their legacy IT infrastructure, and finding solutions for an ever-increasingly complex and broad investment landscape, it is evident the real challenge is staying on the technology band-wagon, and not becoming another technology laggard. 

Key Observations 

As technology becomes more pervasive across the entire investment value chain, interestingly the conversation has moved on from if technology can be leveraged to solve problems. The concern now is how these solutions can help insurers build a best-practice model as they move forward, and equally, where these solutions can be integrated into firms’ workflows to ultimately reduce operational and IT overheads. 

If we consider the market with particular reference to the future landscape, it is clear that complexity continues to be on an upward trajectory. This naturally pushes the boundaries of existing operating models and tech infrastructures, giving rise to significant risk in an industry typically known as being reactive to change. 

Alternative investment types:  

Year on year, Clearwater Analytics continues to see a transformation of clients’ portfolios as they gravitate toward more alternative assets classes in the search for greater yields – with an expected growth from $13.3 trillion in 2021 to £23 trillion in 2026*. When we put this in the context of technology, front-, middle-, and back teams face an increasingly tough challenge trying to manage the complexities and nuances of these instruments with their current operating models – particularly where they lack a means of managing unstructured, or incomplete datasets in a scalable way. 

Data centric:  

Indeed, data in the more broader context continues to be an area where technology plays a large role – and equally where firms fall behind the curve. In today’s modern markets, antiquated approaches to data availability and reporting simply do not set up firms for success. To better support business objectives, manage risk, and align all investment functions, firms must leverage data-centric technologies such as Data-as-a-Service solutions. These provide deeper insights into their portfolios, allowing a more comprehensive, more frequent view of their exposures and risks as well as giving the ability to communicate and share this data on a timely basis with stakeholders. This ultimately leads to an ability to make more informed decisions. If we consider recent events such as Silicon Valley Bank, data continues to play a considerable role, and equally provide a significant risk, if firms only have an after-the-fact view of their portfolios and exposures. 

Ever changing environment:  

Finally, firms would be remissed if they failed to consider technology-led solutions in the context of future macro operating challenges. Accounting requirements continue to become more data-focused and detailed – for example with the introduction of IFRS 9 requiring technology-led applications to reduce operational burden. From a regulatory perspective, disclosures continue to require firms provide a deeper, more granular presentation of their portfolio and the related exposures, with further heightened focus and complexity with the introduction of ESG (also referenced as key ‘banana peel’ risks in the report). Lastly, from a competitive standpoint the introduction of Generative AI and tooling such as ChatGPT continues seeks to disrupt the industry providing an ever-greater ability to automate and streamline processes as firms seek the competitive advantage amongst their peers.  

How We See Clients Adapting 

The introduction or upgrade of technology within an operating model needs to be approached strategically, with a clear vision and plan to not only solve operational challenges, but to promote growth and efficiency. Partnering with a specialised vendor who can partner with you through this transformation is key. It is clear that those who embrace technology as a strategic driver and shift their organisational mindset from reactive to proactive are those who position themselves for the future. 

*Statistic taken from Prequin Global Alternative Reports.