For years, insurers have used short-term investments to protect capital while also generating a return, similar to a Treasury bill index fund or another similar benchmark. Although they typically offer lower rates of return, short-term investments like CDs, money market accounts, government bonds, Treasury bills and other marketable securities are highly liquid and can be easily converted to cash, giving insurers the flexibility to withdraw money quickly, if needed. Short-term investments also offer lower risk with more stable returns during periods of higher market volatility. Any increases or decreases in the value of an insurer’s short-term investments are directly reflected on the company’s quarterly income statement; therefore timeliness, accuracy and efficient management of these investments is critical.
In our experience, we have found that larger insurance companies may create short-term investment “pools,” borrowing and lending excess cash between and among internal legal entities in order to maximize short-term investment opportunities and the use of all available cash. While no two insurers manage short-term pools in the same way, there are a number of common challenges, such as growing costs, administration, compliance, risk and scalability—especially as investment pools grow and become more complex. These challenges can result in operational inefficiencies that may negatively impact returns. Over time, these operational challenges often go unchecked because the pool is treated as a narrowly envisioned side activity that supports a mandate (checks a box) instead of a real opportunity to optimize yield.
In this blog, we look at the role technology plays in addressing common pain points to expand the potential of an insurer’s short-term investment pools.
