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How Insurance Companies Can Better Optimize Yields to Balance Risk and Growth

After many years of low interest rates, inflation is rising and interest rate uncertainty has pushed insurance companies to reach for yields in more complex financial instruments. At the same time, private equity firms are eyeing large insurance asset portfolios as an investment opportunity, leveraging their actuarial and financial engineering skills to increase yields and optimize capital allocation without incurring too much risk. With market volatility, large holdings of structured products and private credit, and an active M&A environment, it is more important than ever for the industry to level up their technology in order to increase returns and manage risk.

Leading insurance companies and investment firms, including 2 of the top 20 U.S. Life Insurance companies and one of the largest private equity firms in the world, are using Beacon’s modern, cloud-based platform to optimize their insurance portfolios. With Beacon, investment teams centrally manage and control their models and analytics for faster and better-informed risk management and investment decisions. Using common data and analytics across assets and liabilities, ensures consistency of results and enables collaboration across teams. 

In addition, Beacon enables a “buy and build on top” model, which allows investment teams to leverage their proprietary analytics to create custom scenarios and dynamically manage reinvestment risk. In particular, Beacon’s ability to integrate structured fixed-income data and cash flows from providers such as Intex into the investment process, is a key differentiating factor for many companies who are stuck with oversimplified scenarios due to systems that cannot accommodate cash flow analytics.

Using Sophisticated Modeling Tools

The search for yield from balance-sheet investments is fueling a trend to more complex financial instruments. This is driving the need for more powerful models and tools that exceed the capabilities of the spreadsheets that have traditionally been used for simpler analyses. At the same time, the scarcity of technical, actuarial, and financial engineering talent means that companies need to better leverage the skills and experience of their existing resources. 

Using a centralized platform, from experimentation through deployment, helps break down internal silos and encourages usage of consistent models at every stage in the process. This helps companies more quickly evaluate new and complex products, asset/liability models, and risk/loss reservation techniques, giving them a strong competitive advantage. Sophisticated modeling tools are also better able to integrate and work with detailed capital flows, optimizing risks and returns. 

Integrating Cash Flow Data

Regardless of the tools used, getting good data is critical. Oversimplifying the models or data used to analyze complex securities makes the resulting risk scenario results largely meaningless. Modern analytics platforms include extensive data integration capabilities that can more effectively work with today’s enormous data sets, whether they are internal or external. The ability to quickly analyze large, complex, and fast-moving data provides another source of competitive advantage, especially when building tailored products or a competitive bid for assets. 

An important example of this is the innovation enabled by integrating cash flow models from Intex Solutions, Inc. Supporting nearly every public and many private structured fixed-income products, Intex’s deal model libraries provide accurate and independent information for evaluating existing and potential investments. Combining detailed cash flow data and modelling with proprietary analytics gives financial engineers and quantitative analysts a significant advantage in both accuracy and time to market.

Evaluating Large-Scale Scenarios

Sophisticated models and accurate data are essential to get useful results, but are insufficient if it takes too long to run the necessary calculations. Cloud-based systems enable these companies to run more scenarios faster, resulting in greater agility and effectiveness in investment decisions. The leading platforms support the investment process from end to end—building and refining models, ingesting data, running multiple scenarios, and ultimately generating better insights. 

These enterprise-scale tools also support broad collaboration and transparency throughout the organization, including important capabilities such as version and governance controls, cross-asset support, and repeatable calculations. Incorporating all assets, liabilities, and hedges into a centralized environment, helps companies better understand and manage their investment portfolio and risk profile.

Balancing Risk and Growth

Companies that are using Beacon Platform are able to move faster and respond to changing risks without sacrificing growth or return on equity. The underlying cloud framework and quantitative technologies strengthen technological foundations, reducing the amount of time and resource spent on basic functionality and infrastructure. Different teams and departments can more easily work together, boosting productivity, reducing internal silos, and helping to alleviate resource constraints. These tools, incorporating modern programming languages and techniques, even help to attract and retain tech talent. The result is a greater focus on proprietary models, analytics, and ultimately a more effective reach for yields that provide the desired balance of risk and growth.