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:
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.
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.
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:
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.
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:
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.
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:
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.