As insurers push further into the asset management space, business performance will become ever more reliant on investment technology. Klaus Holse, CEO of SimCorp, talks to Sarfraz Thind about how the firm is helping insurers grow their investment operations.
Market participants might have seen the name SimCorp appear in conjunction with insurance asset management more frequently of late. The investment software vendor has been spreading its services and gained a number of notable insurance asset manager clients along the way.
The growth attests not only to the successes for the company but also the wider gravitation of insurers into asset management at a time when insurance returns have been wilting. Klaus Holse, chief executive of SimCorp, believes that its involvement with insurance asset management is only likely to grow as investment management becomes an even more integral part of the insurance world.
"A number of insurers, especially life, are in a position where running the business is becoming more capital intensive," says Holse. "Given the regulations, insurance is less attractive than it was ten years ago. Insurers are increasingly focusing on asset management now — they see it as an area which is more interesting. It is less capital intensive and regulated than insurance, and offers more opportunities for alpha generation."
SimCorp, which started life 40 years ago as an accountancy software vendor, provides investment software from front office trading and accounting solutions to portfolio and risk management, data warehousing and client reporting for asset managers, the majority with over €10bn ($11.4bn) in assets. It boasts half of the world's top 100 investment managers as its clients, but the growth of the insurance investment management business has really occurred in the last five years or so.
Skin in the game
Insurers currently make up around 15% of SimCorp's client base. In the last five years it has signed up or extended its work with CNP Assurances, Axa, Swiss Life Asset Managers and, most recently, Vidacaixa and Generali Investments, which the technology vendor announced last December. And this is likely to be just the initial surge into the market as insurance assets under management continue to grow. Holse believes that insurer-owned managers have a natural advantage in the asset management business by having the insurer parent as a pre-existing client—a fact which helps to attract others in.
"If you are an insurer with an asset management arm, you have an advantage over vanilla fund managers," he says. "You have your own assets and can create products to suit your strategy. By investing in these products, you have skin in the game, which will attract others to your funds. It is a natural advantage."
Holse previously served as president of Microsoft's Western European business. The Dane moved to become chief executive of the Danish SimCorp in 2012 and currently oversees 500 people working on the SimCorp product.
The five years since he joined have been a fruitful period and one in which the operational needs of insurers to deal with newer and more esoteric asset classes has grown as the industry widens its asset allocation.
"If you are an insurer with an asset management arm, you have an advantage over vanilla fund managers"
The SimCorp Dimension platform works with several aspects of the trading and investment process, including asset accounting, cash flow integration and asset liability management across front and back offices. Its ability to integrate the front- and back-offices is important. As different parts of the portfolio have different regulatory and capital requirements, all of which will have a different impact on their profit and loss accounts (P&L), insurance portfolio managers need to have a wide-angle view on how changes to their portfolio will impact things.
SimCorp's system allows comparability across multiple operational and accounting standards. Holse says it is currently the only vendor with an Investment Book of Record [IBOR] providing a single source of data spanning multi-asset coverage, which will give the same set of data across front, middle and back offices.
Allowing everything that sits on the system to be available for review across front to back offices before rebalancing the portfolio has become even more important nowadays, given the regulatory and market challenges insurers face. As regards the former, Holse believes that Solvency II has been one of the major drivers pushing insurers towards automation and putting increased focus on cost management. Processes like reporting and regulatory compliance, which were once manual, must now be automated.
"Cost reduction is something we spend time on," says Holse. "Clients are saying they have doubled their assets under management without increasing costs. Reducing from ten vendors down to one is also an exercise in risk reduction."
Holse provides the examples of Aegon Asset Management, which has automated more than 85% of its trading processes and been able to reduce headcounts by 15% after implementing SimCorp's Dimension product.
Tailoring to insurer demands
The finessing of the product to deal with new insurance investment requirements takes work. SimCorp puts 20% of its revenue—which equated to close to €60m last year—back into research and development (R&D) annually, which Holse says is more than its competitors.
"It is complicated to get there," he says. "To build an IBOR, you need continued investment and development, which is what SimCorp has set out to do over the last 20 years. We want to deliver our clients technology that covers all asset classes and the continuously growing number of new financial instruments."
The R&D is necessary to enable the software vendor to cope with the ever widening scope of assets that insurers invest in these days. More insurers are demanding a real-time view across new asset classes incorporating functionality for the long-term, illiquid and non-traditional assets they are investing in right now, a trend which shows no signs of abating. And SimCorp is continuing to build out its alternatives offering. Earlier this year, it released a private debt module to allow its platform to be used on what has been the biggest growth asset for insurers, with the planned addition of real estate and private equity in the coming years.
"A few years ago the big trend was in derivatives," says Holse. "Now insurers are taking the step beyond this, into illiquid instruments, such as private debt. In the long-term there is likely to be even more of a move into loans, real estate, infrastructure and private equity because they have the long-term view that fits with the insurance strategy. Insurers want to understand risk across all asset classes. For insurers it is important to understand the various permutations of risk and exposure and how this impacts the overall portfolio."
SimCorp's addition of new assets is required to keep pace with the changes in the industry. Indeed, while insurance is often accused of being slower than other industries to track market changes, this is not wholly true these days, says Holse.
"It's not true that insurers are slow to change — some have been quick out of the gate others slower — it is a mix. But now with increasing pressures coming from market drivers such as regulation, there is more motivation to adapt. Unless you figure out now how to be operationally and cost effective it is going to be harder for you to get mandates from external clients and deal with regulatory scrutiny."
The battle for insurance assets
So, what about the future? Clearly investment management is an attractive and growing business for the insurance sector. Nonetheless, it is a competitive environment and despite the greater plethora of tools available to them, investment management is not something that can be handled by all. With that in mind, Holse believes that consolidation is inevitable with those who cannot manage their assets efficiently most likely having to fold into others.
"Unless you figure out now how to be operationally and cost effective it is going to be harder for you to get mandates from external clients and deal with regulatory scrutiny."
As for SimCorp itself, its main competitor remains BlackRock with its Aladdin system. Holse says that SimCorp has the advantage of its integrated front-to-back accounting system, which BlackRock does not have, and which makes it harder for it to work with insurers.
"Insurers want to understand the risk across front, middle and back offices to see the impact on solvency capital amongst other things, having a system like SimCorp Dimension gives them the operational foundation from which to do this," he says.
The company is working on other initiatives. In June, SimCorp announced a €35m deal to buy Italian investment software vendor, APL Italiana, which focuses on providing technology to the insurance sector. Holse says that APL Italiana is a company with the same interest and development as itself, and its focus on insurance gives SimCorp a bridgehead into Italy.
Beyond that, it is also targeting North America. SimCorp won one big US client a year ago, although it is not able to say who. It is hopeful of more large wins in the next few years. Cleary there is a pressing need for investment management technology in the industry and these are the kinds of targets SimCorp will be pursuing in future.