The digital automation of Luxembourg Life Insurance Companies is progressing quickly
06min
1 A positive regulation to support an attractive market
Luxembourg regulation for Life Insurance contacts offers a very attractive set of characteristics that have supported the local development of the biggest companies in the sector over the last decade and at SuisseTechPartners we are delighted to say that we fully support such Life Insurance Companies through deployment of our global product “PMPlus”.
That strength of this industry resides in the following characteristics:
– Close supervision of such schemes by the local regulator, the “Commissariat Aux Assurances” (ACA)
– A clear segregation of duties between the Life Insurance company and the Depositary Bank; holding the assets to guaranty full protection to the contract holder against a bankruptcy or other such events.
– The status of “first ranking creditor” for the contract holder
– The capacity to hold contracts in other currencies than the Euro
– The permanent availability of contract assets as the Life Insurance Company – i.e. the Company cannot block asset withdrawals
– The contract holder can freely designate the ultimate beneficiaries of the contract to receive benefits upon completion
– The flexibility to opt for different types of underlying assets and the flexibility of the investment guidelines indexed on the size of the contract and the wealth of the contract holder,
– The taxable position (such as an unrealized gain) within the contract is not impacted by a change of portfolio manager
– People non residing in Luxembourg will not be taxed on the contract signed in Luxembourg, only according to their home country tax law At the end of 2023 the total assets of such Luxembourg Life Insurance contracts amounted to 222 billion euros according to ACA statistics, and 79 % of total assets were invested in Unit Linked contracts benefiting of the expertise of Luxembourg in fund distribution.
The regulation is de facto creating a segmented market with five categories of investors (N, A, B, C, D) defined by the maximum amount of the contract and depending on the movable wealth of the owner. For each category there are clear investment guidelines by asset type. Yet, the level of expected services will be driven not only by the profile of investors but by the industry competition as well.
As seen above, most of the assets are invested in Unit Linked contracts – investing in external and internal funds – and one could imagine the offering for the majority of the contracts to be straightforward and uniform. Most Life Insurance Companies have suppressed entry fees and the yearly management fees tend to be very similar across Companies. The key differentiators are on the solvency of the company , the variety of investment funds proposed for subscription ( UCITS , PE Funds, soon ELTIFS) and the quality of operational services ( execution, on line arbitration, …..)
For the wealthier and potentially more sophisticated investors the main factors of success will be based more on the range of investible assets, the capacity to monitor investment guidelines and the manager’s performance.
2 A market with new and growing needs
To some extent, the Life insurance markets is experiencing the same revolution as the Banking industry resulting from several key requirements:
– The digitalization of their processes to improve the client experience and satisfaction. More and more Investors want to access their portfolio on-line with more frequent valuations and the capacity to make timely investment decisions.
– The capacity to offer a wider variety of financial instruments requested by investors at a time when interest rates were particularly low. Life Insurance Companies have to work in coordination with Depositary Banks who are facing the same difficulties to serve their clients that wish to invest in digital or private assets
– The demand for more sophisticated reports to monitor the actual performance and adequacy versus the investor guidelines. Portfolios attached to a Life Insurance contract can be of significant size and sophisticated. Investors do expect to get a clean reporting with integrated performance and risk data
– The rise of ESG as a critical consideration, which is a challenge across all steps of the portfolio management and the reporting processes
– The need to automate their processes to reduce operating costs and risks. Obviously Life Insurance Companies and Depositary Banks share processes but the Life Insurance Company is ultimately responsible vis à vis the investor and owns the assets impacting their balance sheet.
Processes like portfolio rebalancing, fund execution, custodian reconciliation or portfolio valuation should be highly automated
– the need to monitor cash flows in a consistent way to optimize their treasury and associated risks in a rising interest rate environment
– the willingness to increase their oversight on Depositary Banks and to control portfolio valuations as not only are they required to provide their clients, but it also does impact their technical reserves
– The need for full multicurrency valuations of the underlying assets and the portfolio itself if denominated or invested in a currency different from the Euro or other base currency.
3. Life Insurance companies do have solutions to face their operating / servicing challenges
The evolution of the Life Insurance market is obviously a source of opportunity for the future as it is attractive for the end investors in many aspects. Though, this evolution generates strong operating challenges for the Companies who have to adapt to the investor needs, the regulation and the evolution of their competitors:
– Life Insurance companies have over the years created links with Depositary Banks who are facing difficulties dealing with new asset classes like private or digital assets in a consistent way, in order to feed data back to the Life Insurance Company. There is a need to streamline these connections as much as possible in order to reduce manual processes.
– Their own IT architecture might be somewhat obsolete in respect of digitalization, new classes of instruments, heightened service expectation, and the need for efficient data management. At the same time it is costly and complex to redevelop brand new platforms while competition and market evolve
– They need more and more to develop an independent set of controls to oversee the activities of the Depositary Bank versus a simple reliance on data received at month end which may not be sufficient anymore.
The needs of Life Insurance companies do not differ much from those of other asset/wealth managers in the sense that they need to receive comprehensive positions and transactions files from the custodian banks, reconcile these data and then provide appropriate reporting. Part of the complexity is that such transactions are generally high volume and smaller ticket-size which can easily overwhelm processes originally designed for lower-volume and higher ticket sized institutional business.
The evolution of client expectations, and of the complexity of portfolios makes it less and less easy to rely only on the custodian bank data. The Insurance Company must have the capacity to have their own independent set of data which they can reconcile internally to multiple external providers (custodian, fund administrators or market data vendors…)
This is where the new technology platforms launched on the market and mostly developed by financial technology (Fintech) firms do offer efficient solutions to meet these requirements and face most of these challenges.
The combination of recent technology components (programming languages, reporting component, web services, cloud services, machine learning,…) such as those available in SuisseTechPartners’ PMPlus application provide agile solutions which are functionally rich and easier to deploy with a modular approach if needed. Control of data flow by automated filters, alerts and consequent exception processing/dashboards, streamline the operating model to a more manageable dimension.
The following diagram shows the functional design of such platforms in which the nucleus is the Investment Book of Records (IBOR) which captures all transactions and positions for a given portfolio / investment structure.
The purpose of building the IBOR is many fold:
– Build a consolidated view of assets based on an efficient acquisition of data from multiple sources
– Reconcile several sources to ensure the consistency of the position build
– Repair positions not matching in connection with the source(s) of data used
– Enrich positions with data not provided by external sources and required for subsequent processing.
Once the IBOR positions are confirmed, they can be consistently reused for functions such as compliance monitoring or performance analysis as the base information is the same for all calculations and reports.
The logic of the IBOR sounds attractive but it is essential to check that data injected are fully reconciled and cleansed to get a clean set of accurate positions before making any fancy calculation and generating reporting.
The best way is to build the position is based on individual transactions which can be integrated at any stage after the execution / confirmation level. Then, the positions can be reconciled with external sources such as the Asset Management Middle Office, the Custodian and /or the Fund administrator.
Some could say that the concept of IBOR has been around for a while and this is right. The difference is that today new technology components allow newly developed platforms to be much more powerful and agile in their capacity to develop new functions, interface with new counterparties or provide enhance and user definable reporting. These elements are critical to optimize the implementation process.
The second important element is that most players have to cover the same investible universe composed of custodial and non- custodial assets. The main differentiating factor among them is the budget available to build an IBOR solution. This is where platforms such as PMplus being cloud based, with broad interface connectivity offered in a SaaS model can be implemented quickly. Furthermore, a secure multi-tenant capability contributes to a more affordable solution for all types of budget.
4. Conclusion
The success of this industry and continued growth is dependent on the large scale automation, through rapid SaaS deployment, broad existing connectivity, advanced transaction filtering and matching, exception management/dashboards, and time-critical alerts.
At SuisseTechPartners we have built the processes and capabilities necessary to support this industry and we would be delighted to further discuss this topic with you and to show you how we could support your company in adapting its technology architecture in this fast evolving environment.
