Insurance investment management: A Fit for Growth approach to grow profitability

Published: December 20, 2016

Executive summary

Since the financial crisis, midsized insurance investment managers (IIMs) — those with US$100 billion to $500 billion in assets under management — have struggled to increase revenues, even as margins have declined. Their performance is in stark contrast to that of large and small IIMs, which have seen annual net income growth of more than 20 percent, thanks to prescient investments in scale and expertise.

To tackle this problem, midsized IIMs need to apply a Fit for Growth* approach, which involves clearly defining their value proposition to the market and building the capabilities they need in order to deliver on that value proposition. Six capabilities are particularly ripe for investment:

  • An electronically integrated investment life cycle across asset classes and markets
  • Enhanced reporting and analytics
  • Leveraging internal or external utilities for the middle and back offices
  • Digitization
  • Data management
  • Enabling capabilities, such as risk management and talent management

The fit for growth exercise should ultimately lead to a more streamlined, scalable operating model that can absorb new assets under management more efficiently and profitably. In our experience, this next-generation operating model delivers cost savings that range from 20 to 50 percent, and also helps companies increase revenue by 5 to 10 percent. Equally important, this process will leave companies more efficient and with the foundation in place to support future growth.

*Fit for Growth is a registered service mark of PwC Strategy& LLC in the United States.

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Winners and losers

In the years following the financial crisis, insurance investment managers (IIMs) slowly recovered from the steep losses they had incurred. By 2014, IIM assets under management (AUM) and revenue had finally returned to pre-crisis levels, according to Strategy& research. During that catch-up period, however, IIMs increased their asset base more slowly than the overall asset management industry — 7 percent each year from 2010 to 2014, versus 9 percent for the entire industry — due to slower growth in premiums and lower financial returns. (We project that IIMs will account for approximately US$20 trillion of the $100 trillion global asset management industry in 2017.)

But that mediocre growth rate masks a significant divergence in performance among IIMs, with clear winners and losers depending on their size and strategy. For example, larger players, with $500 billion or more in assets, grew AUM by about 11 percent annually from 2010 through 2014 and boosted profits due to scale in an increasingly commoditized, price-sensitive business. Although this group posted just 5 percent revenue growth during that period, it grew net income by about 28 percent annually, primarily by leveraging scale to reduce unit costs.

Meanwhile, small players, with less than $100 billion in assets, grew AUM by about 15 percent per year and boosted profits by focusing on higher-margin, specialized products, segments, and geographic markets, leading to 12 percent annual growth in revenue and 23 percent margin growth annually.

The struggling performers have mostly been among the midsized players — those with $100 billion to $500 billion in assets under management. These players, which saw annual AUM growth of only 4 percent, neither invested adequately to scale the business and lower costs nor specialized enough to gain pricing power. As a result, their revenue grew by just 1 percent and margins actually declined by 1 percent. Midsized players have also had the most difficulty containing costs. These IIMs have been hiring twice as fast since the financial crisis as they did before. This suggests they are relying on more manual processes to support additional growth and to cope with increased regulatory requirements and product complexity across multiple geographies.

In our research and work with clients, we have found that IIMs with $100 billion to $500 billion in AUM generally have not invested enough over the last several years on new technologies to streamline processes, improve operations, and generate scale advantages. They continue to suffer from siloed organizations laden with costly customization, redundancies, and operational complexity.

On the bright side, midsized IIMs have an enormous opportunity to optimize their cost structures and transform their operating environment to better scale and support growth and improve profitability. Moreover, the successes of others — particularly the larger players — offer important lessons and show a path forward for those with aspirations for greater size and better profitability.

Senior leaders at many midsized IIMs recognize this challenge, and they are starting to put growth, scalability, efficiency, and technology at the top of their management agendas. They are also beginning to grapple with difficult questions:

  • How do I explicitly link strategy to our growth agenda and cost transformation in a sustainable manner?
  • What are the right technologies to support our future operating model?
  • How do I electronically integrate investment processes?
  • How do I efficiently meet evolving regulatory and compliance requirements? How can data-driven and analytics-driven insights help?
  • How do we grow in a tax-efficient manner?

Looking forward

As recent trends in the IIM industry clearly show, revenues are on the upswing. But to handle the AUM growth profitably and reap its full benefits, many IIMs — particularly midsized companies — will need to transition to a more scalable model. That’s not easy in today’s global environment, when regulatory, product, and geographic complexities seem to mount by the day.

Clearly, every IIM requires a strong investment management team that delivers attractive risk-adjusted returns to its clients, optimized for internal versus third-party needs. But firms also need two additional characteristics: a clear business configuration — vision, product/client/ channel mix, operating model, and performance metrics — and robust underlying capabilities to nurture the new business configuration and maintain coherence. The Fit for Growth framework is a way to orient the enterprise around these needs and to achieve profitable growth at the level of the world’s top IIMs.

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Insurance investment management: A Fit for Growth approach to grow profitability