Insurers boost scenario modelling spending as investment complexity increases

Written by Adam Cadle

29/02/2024

Insurers are boosting spending on scenario modelling, optimisation and testing in the face of rising investment complexity and challenges for the industry, a new global study among investment management professionals in life insurers, London markets (re)insurers and investment managers who support insurers, has shown.

Nearly nine out of 10 (87%) questioned are increasing spending at their own firm while 86% expect increased spending across the sector as a whole over the next three years, with 14% forecasting a dramatic increase.

The study from Ortec Finance found 84% believe the level of 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%) questioned say the relatively new risks and issues, such as liquidity and correlation posed by alternative asset investments, means insurers and insurance asset managers need to invest more in scenario and stress testing.

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 in the study.

Regulatory pressures are adding to the need for improved modelling along with climate risk and a general rise in risks faced by insurers. Just one in seven (14%) rate the accessibility, user friendliness and overall usefulness of current stress testing, optimisation and scenario modelling software as excellent, while 69% believe it is “good”.

Currently, three out of four (75%) of insurers and insurance asset managers conduct up to half of their scenario modelling, optimisation and stress-testing in-house, with the remainder being performed by their asset manager or a specialist consultancy firm.

Hamish Bailey, managing director UK, and head of insurance & investment said: “Scenario modelling and stress testing is vital to the success of insurers' investment portfolios and that is reflected in the expectation of increasing investment in modelling.

“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.

“While firms are generally happy with the software available it is clear there is room for improvement and a growing demand for specialist support.”

Survey respondents are located in the UK, the USA, France, Germany, Hong Kong, Italy, Netherlands, Singapore and South Korea. Collectively the organisations they work for manage around $5trn.

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