Processes around reducing cost and efficiency versus doing a good job and innovation, in general, are a sore point for many companies.
Staff can feel pressured and the business leaders risk damaging morale if done incorrectly.
This was a discussion point at a roundtable of senior investment leaders across the insurance industry. The group discussed target operating models where they feel emphasis should be and what their own experiences have led to.
The discussion now forms part of a new report, “Future-Proofing The Insurance Target Operating Model”, which has been published in conjunction with Clearwater Analytics.
“I built something that was inefficient, but I had to
meet regulatory requirements."
In it, Michela Bariletti, Chief Credit Officer, Phoenix Group, and Ashish Dafria, Chief Investment Officer, at Aviva, discuss the issues that it raises from the complexity premia to whether the absorption of bloat can be a good idea in the long term.
The question posed to them focused on thinking about inefficiencies and how they can get greater value for money when looking at problems with certain approaches.
What should the checklist that you can apply to the operating model to change what is no longer fit for purpose be? It also raised issues of how much of this is subjective versus quantitative and is there a benchmark cost or process.
The debate centred around how an operating model works in identifying it and taking the emotion out of investment decisions and operational matters. This is particularly relevant, said the panellists, when it comes to staffing matters.
“I built something that was inefficient, but I had to meet regulatory requirements, so I spent three years writing process notes so that I didn’t have key people [having a] dependency on a manual input,” said Bariletti. “But the technology is not as fast as writing a process manual to say what people do when you are addressing a concern on your internal audit and regulatory [needs]."
She explained that if a problem arises you don’t have the key control being produced because there is only one person who knows the various pension schemes, the two aggregate counterparties, and how to take data from one institution to another and put them together in an Excel spreadsheet.
“I ran an asset management team with the most Excel spreadsheets after my derivative guy because I had an internal rating scorecard Excel spreadsheet,” she said and added that her team’s aim was to reduce spreadsheets. “But if you asked what our current model setup was, my model was out of date when I started building it. Unfortunately, you are going into it consciously because you do need to meet regulatory requirements, and you can find yourself in an inefficient place to meet key controls.”
The obvious jumping point in today’s business environment is therefore artificial intelligence, where so many solutions are promised. For example, new research this month revealed over half of fund administrators (55%) are now struggling with data acquisition and governance due to the rapid growth of private markets, which many think only AI will be able to help them with.
However, Bariletti’s thoughts were more holistic than that.
“I am not saying to create AI that makes us make investment decisions,” she said. “I am talking about credit at this point to ensure that I can prove to everyone that we meet key controls.”
Those featured in the report said the human elements were the trickiest – but the most rewarding when it went right – to balance.
However, these were part of a larger operational sphere that was becoming more philosophical as models and the wider working world changed.
“Identifying when you have become inefficient isn’t a difficult question, as from both perspectives, given the types of industries that we operate in, the pressure to be more efficient this year than we have been, is going to be there,” said Ashish Dafria, Chief Investment Officer at Aviva who said long-term had to be the focus.
Dafria said that identifying these areas should have equal status with consideration of what a company’s competitive edge and advantage were and what they wanted the business to be. This dilemma in investment was not new: In 2023 McKinsey released a report, “Performance Edge: Investors hone their strategies for a new era,” which looked at the issues going forward for investment leaders and focused on the changing business models and challenges. “Institutional investors recognise they cannot internally hold the full range of capabilities needed to thrive in an uncertain world,” it said.
“A major question is where to focus on building capabilities and where to partner. Many institutional investors are building expertise in select areas and partnering with other organisations to complement their core capabilities,” McKinsey’s report continued. “Some are exploring ways to combine resources to create longer-term, more stable pools of capital.”
"We get to a place where we know that our operating model is
getting inefficient almost a year after it has been set up.”
The report concluded that “The institutional investors that evolve their purpose, their portfolios, and their proficiency to become more resilient, nimble, and responsive to the changing environment will have an edge in the next decade.”
Dafria’s thoughts were similar to this with discussions around how much the company could go and where it could ‘absorb’ certain positives and negatives.
“One of the routes we have decided is that we are going to absorb complexity and that is our edge as long as we get paid for it,” he said. “This means that we get to a place where we know that our operating model is getting inefficient almost a year after it has been set up.”
The challenge, he added, is then more around “what are we going to do about it?”.
“Are we going to wait four years when it then becomes a bigger problem and then have it become a big transformation project or is there something we can do incrementally?,” he said.
Dafria added that the KPIs on this strategy weren’t difficult to ascertain or deliver on “as you can look at this either from an operations risk perspective or from a cost basis point perspective” – or, he added, under the onus of how long it is taking for certain processes to get through.
Either way, processes will change, new risks are on the horizon and the investment operations team that stands still is already behind.
