Centralization Strategies for Insurance and Asset Management Firms

As companies in these industries grow and encounter new complexities, the treasury function is uniquely positioned to become increasingly strategic and is moving towards a more centralized model in the drive for efficiencies, visibility and control.

Key challenges for these industries
Companies in these particular industries must strive to increase profitability in mature markets while exploring new markets to grow revenues. Both types of firms grapple with the impact of economic and political uncertainties of a low interest rate environment, and also must contend with unique regulatory reforms. Other complexities specific to each industry include:

  • Insurance: Pressures on cost, capital and profits resulting from the sovereign debt crisis, heavy losses on natural disasters and other catastrophes, and the looming implementation of Solvency II.
  • Asset Management: Potentially costly regulatory reforms, such as Markets in Financial Instruments Directive II (MiFID II), Alternative Investment Fund Managers Directive (AIFMD) and Foreign Account Tax Compliance Act (FATCA). In addition, the current market environment is impacting both market returns and investors' appetite for risk assets, exacerbating the longer term compression of fees and margins.

Against this backdrop, managing global cash positions and risk exposures has taken on increased significance and complexity, giving the treasury function an even more central and strategic role. For the many insurance companies with asset management arms, the drivers affecting both industries reinforce this point.

Treasury's evolution to a more centralized model
Consequently, a growing number of treasuries in these industries are evolving into a strategic function. Treasury is aligning their objectives with overall firm objectives and playing a leading role in defining broader risk management policies. Specifically, many are following steps taken similar to companies in the corporate sector that have moved towards a more centralized model.

Why centralize?
Cost and operational efficiencies, effective liquidity management and maximum use of internal cash are key drivers. In addition, the improvements to risk management are an increasingly crucial benefit for companies in these highly regulated industries. Treasury needs to gain visibility and control over cash and build a centralized view of exposures to each type of risk - even at asset managers where the funds' FX strategies are managed outside of treasury.

How does centralization happen?
The chart below illustrates the typical stages of treasury centralization and associated activities for each.

Treasury Centralization

Typical stages of treasury centralization

Although there have been many treasury advances in the insurance and asset manager industries, centralized structures are still not as widespread as in the corporate sector –
partly due to considerations that are unique to these industries.

Considerations for centralization
The geographic spread and flow of the organization's funds are significant factors in determining whether to centralize treasury activities. Restrictions that may affect centralized structures and physical cash consolidation include:

  • Exchange controls
  • Tax, legal or regulatory requirements that prevent movement or commingling of funds

Although these restrictions also affect corporates, the insurance and asset manager industries are typically subject to stricter controls. On top of this, they must also comply with specific restrictions around the commingling of fiduciary and non-fiduciary funds.

In the insurance industry, regulatory capital requirements in the upcoming Solvency II regulations may present a strong incentive for primary insurers and reinsurers to maintain decentralized structures, as regulators and rating agencies evaluating capital adequacy increasingly look at cash held at the local level.

Centralization strategies
That said, centralization to a global or regional model might offer benefits that outweigh any incentive to maintain decentralized operations, especially for multinational firms. Alternatively, some firms may benefit from strategies that help them gain centralization benefits without the physical consolidation of cash. Treasurers are exploring a number of centralization strategies that address cash and risk management objectives while also being compatible with various regulatory, market and organizational factors.

Three primary strategies of consideration are:

  1. Improve visibility and control over cash positions and risk exposures
    As a first step — and one that does not necessarily require physical restructuring — treasurers are seeking ways to increase visibility and control over global cash positions. In doing so, treasury can increase efficiencies, reduce fraud and improve the accuracy of cash flow forecasting. Electronic banking tools can help firms achieve a consolidated view across countries, currencies, legal entities and banking relationships - as well as supply timely reporting of risk exposures. Advanced solutions include features that manage intercompany loans and provide detailed illustrations of cash concentration.

  2. Maximize the use of cash
    Key strategies for global or regional models include streamlining account structures via bank account reconciliation and account restructuring, as well as centralized global/regional liquidity management. Examples of the latter are physical cash concentration solutions that incorporate sweeping and pooling, whether across multiple entities, banks and/or currencies. These tactics overall can provide a host of benefits, including:
    • Central oversight and control of local cash positions
    • Cost and time efficiencies, including reduced reconciliation fees
    • Increased self-sufficiency via maximized use of internal cash
    • Optimized liquidity through enhanced use of operating cash across all entities

    In circumstances where physical concentration structures may not be feasible, solutions include interest optimization programs — which offer improved rates by taking a consolidated view of cash held in multiple currencies – and other market-specific structures and solutions.

  3. Drive for efficiencies
    An increasing number of treasuries have found efficiencies via streamlining and centralizing processes, such as:

    • Operations: Key areas include enhancing interoperability of treasury processing systems with other internal and external systems, as well as eliminating manual, paper-based and disconnected procedures.
    • New technologies: Investing in a more advanced Treasury Management System (TMS) can lead to reduced costs and operational risk, as well as increased operational effectiveness. Some companies have already invested in SWIFT membership, whilst others are investigating its value to their business. Electronic bank account management (eBAM) is another upcoming area of interest.
    • Working capital management: To optimize working capital, treasurers look to standardize, automate and streamline payables and receivables. This can result in significant cost savings, reduced errors and fraud, working capital release, maximized liquidity, and improved customer and supplier relationships.

Selecting appropriate strategies
With such a range of centralization options, how should treasurers determine suitable strategies for their firm? First, perform a cost/benefit ratio. Easier-to-quantify factors include:

  • Potential costs, e.g., project management overhead, initial outlay etc.
  • Potential savings, such as increased investment return, lower bank fees, lower IT costs and saved headcount

More difficult to calculate are the benefits of better visibility and control of cash, as well as improved risk management.

Second, the appropriate solution also will take into account specific internal demands, as well as industry and regulatory requirements. A firm can ask its global banking partner to provide tailored solutions that leverage industry best practices, optimal account setup and favorable liquidity structures.

Bringing it all together
As the insurance and asset management industries consider the benefits of centralization, treasury has an increasingly strategic role to play. Choosing the right strategies can provide tangible returns that help firms manage growth while also meeting demanding operational and regulatory requirements.

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