Insurers are boosting spending on scenario modelling, optimisation and testing in the face of rising investment complexity and industry challenges, according to a study.
The study from Ortec Finance, a risk and return management solution provider for insurers and other financial services companies, was conducted on investment management professionals in Life Insurers, London Markets (re)insurers and investment managers who support insurers.
Nearly 87% questioned reported increasing spending at their firm, while 86% expect increased spending across the sector over the next three years, with 14% forecasting a “dramatic” increase.
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According to the study, 84% of respondents believe investment complexity and challenges the industry faces will increase over the next two years.
One issue driving increased spending on scenario and stress testing is the growing use of alternative asset classes by insurers. Almost all (97%) said that the relatively new risks and issues, such as liquidity and correlation posed by alternative asset investments, mean insurers and insurance asset managers must invest more in scenario and stress testing.
According to the study: “The increased focus on more esoteric, illiquid and unlisted asset classes as the search for yield intensifies is regarded as the biggest factor driving increased spending on scenario and stress testing. A growing focus on transparency and reporting is also a significant factor.”
Additionally, regulatory pressures combined with climate risk and a general rise in risks faced by insurers are adding to the need for improved modelling.
About 14% rated the accessibility, user-friendliness and overall usefulness of current stress testing, optimisation and scenario modelling software as “excellent”, while 69% chose “good”.
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Currently, 75% of insurers and insurance asset managers conduct up to half of their scenario modelling, optimisation and stress-testing in-house, with the remainder done by their asset manager or a specialist consultancy firm.
Hamish Bailey, managing director UK and head of insurance and investment, commented: “Increased use of alternative asset classes is a key factor in the increased spending, but insurers are grappling with a wide range of issues including the need for greater transparency and regulatory pressure as well as climate risks.”
