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Key trends in life insurance operations

July 18, 2020


Three key life insurance industry trends have important ramifications and create strategic opportunities for insurers’ derivative operations and hedging programs.

A prolonged low-interest rate environment has challenged the returns of life insurers for more than a decade. With the Federal Reserve lowering interest rates in 2019 for the first time since the great recession, companies now face renewed concerns with how this may impact their financial performance and investment strategies. Chatham Financial has observed firsthand three key trends taking place across the life insurance industry in reaction to the current economic environment. These trends have important ramifications and create strategic opportunities for insurers’ derivative operations and hedging programs.

Trend 1: Reducing costs and improving operational efficiencies

In a sustained low-interest rate environment, investment yield is harder than ever to generate, even for the most sophisticated investors. According to US Statutory reports, life insurance net yields on invested assets have fallen almost 40% in the last 10 years.1 As a result, companies have renewed their focus on processes and cost-saving opportunities. In fact, firms who modernize and generate process efficiencies often gain significant competitive advantages. By closely evaluating internal processes, insurers often find operational functions that require improvement. For example, large US life insurers spend up to $30 million annually to manage derivative operations. Even for small- to medium-sized life insurers, derivative operations cost in the many millions of dollars. Insurers should analyze the components of these costs and consider if cost savings and efficiencies can be gained. Can all the resources to support these programs – including manpower, software, hardware, and supporting systems – be utilized more efficiently? Many companies find that that answer to this question is a resounding “yes!” In some cases, savings of 40% or greater are realistically achievable.

Trend 2: Updating technology

According to KPMG International’s 2019 Global CEO Outlook,2 73% of insurance firms are expected to undergo radical technologic transformations to remain competitive. Thoughtful technology usage can help create innovative products, provide a holistic and enduring customer experience, and produce internal efficiencies. This certainly applies to many insurers’ derivative operations processes where companies are dealing with outdated systems that are inflexible, costly to maintain, and unable to support the business’s growing needs. These inadequate solutions create a drag on the business that leads to delays in new strategy implementation, continued drains on operating budgets, and a weakened control environment. When considering technology solutions, companies should consider a technology’s ability to provide flexibility, extensibility, and scalability, all while controlling against inflated or rapidly rising future costs. When successfully implemented, life insurers can greatly benefit by automating operational procedures, improving their control environment, and freeing up key personnel to focus on higher-order and more strategic initiatives.

Trend 3: Focusing on core offerings

Recently, life insurers of all sizes have been re-focusing on their core offerings. With limited resources and increasing competition and margin pressure, companies need to carefully consider where their strategic advantages are and play to their strengths. This has led many companies to begin outsourcing certain tasks that are operationally important, but are not areas of competitive advantage. For many life insurers, non-core activities may detract from delivering exceptional service or from the company’s strategic initiatives. Certain non-value-creation tasks can often be accomplished more efficiently and at lower costs when leveraging the capabilities and economies of scale that have been achieved by service providers. In addition, even mission-critical tasks – such as derivative and hedging operations – that are core to the business but largely standardized across the industry, can be improved and generate value by leveraging the expertise and system solutions of trusted business partners. This trend has led many life insurers to seriously consider partnering with outside firms to handle derivative operations such as execution, regulatory reporting, accounting, and collateral management. For example, according to Deloitte’s 2019 Insurance Outlook, the number of insurers using SaaS platforms has increased by over 40% since 2016.3 By refocusing on their core competitive advantages and outsourcing the rest, life insurers are better able to meet the growing needs of their customers while achieving superior financial performance.

About Chatham Financial

A leader in debt and derivative solutions, Chatham Financial serves clients across industries including insurance, asset management, financial services, banking, private-equity, real estate, and corporates. We work with clients to develop, execute, and operationalize financial risk management strategies aligned with their objectives. Our solutions include expert advisory services in all phases of derivative operations, and technology offerings that enable clients to scale their programs efficiently

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1. US Statutory reports for Net Yields on Invested Assets

2. KPMG International’s Global CEO Outlook:

3. Deloitte’s 2019 Insurance Outlook: