Insurance Asset Management in China – Developing core business systems in new markets
By Gao Shong
China’s insurance sector has experienced robust growth over the past decade, with total asset size and fund balance increasing more than ten-fold since 2000. But the industry is not without its challenges, especially on the technology side, which has struggled to keep pace with demand from the market. Gao Shong, Head of IT for PICC Asset Management offers FIXGlobal his assessment of the technology issues that must be resolved for the industry to move ahead effectively.
With the rapid development of the insurance business, the scale of asset management in China’s insurance industry is also growing at high speed. The latest available numbers (Oct 2008) show a ten-fold leap in assets managed and fund balance in less than 10 years, to RMB 3.19 trillion and RMB 2.89 trillion, respectively.
Beginning in the 1990s, Chinese insurance companies, such as China PICC, China Life, Ping An and Taikang, have all set up specialised asset management units, and since 2003 the same firms have gradually launched insurance asset management companies, based on the external trustee model (trust and managed funds, and independent trust) seen internationally.
At present, there are nine Chinese-funded (China PICC, China Life, Ping An, Central Reinsurance, Pacific Insurance, New China Life, Taikang, Huatai, Taiping) and only one foreign-funded (AIA Insurance Fund Operation Center) companies. Together these asset management companies are responsible for nearly 90% of the assets of China’s insurance industry.
Broad range of financial products on offer
For these firms, insurance investment covers not only fixed-income operations, such as treasury bonds, financial bonds, corporate bonds and subordinated debts, but also equity operations such as stocks, funds and equities. In addition, the firms are actively exploring infrastructure investment, foreign investment and derivatives, such as ABS, MBS, REITS, bond futures and stock index futures.
In terms of insurance asset allocation, there are four characteristics: diversified asset structure, diversified sources of earnings, innovative investment instruments and international market scope.
In the meantime, as the Mainland regulatory body gradually relaxes restrictions on insurance asset management in operations such as third-party business, corporate annuity, investment and investmentlinked insurance, the number of investment portfolios managed by insurance asset management companies is growing rapidly.
Learning from the international model
The result is an industry that has progressed rapidly in both professionalism and accountability, often taking the lead from the internal management processes of the foreign asset management model.
Internal and external pressures
From the first-level asset allocation to the second-level professional fund allocation and the subsequent order placement, transaction settlement and final portfolio analysis –
including cash flow, risk indicators, internal performance attribution – each process involves strict risk control and monitoring. With the scale and scope of insurance investment expanding, internal analysis and management processes are increasingly complex. Away from the internal processes, the requirements of the regulator and client with regard to transparency, timeliness and research data is also increasingly stringent.
Front, middle and back-office architecture
Together these internal and external pressures are pushing the industry to examine and integrate their core business systems. Presently, the architecture in most domestic firms comprises front, middle and backoffice components. Front office includes the investment trading system, with the main functions being portfolio management and execution of on-market, offmarket and foreign transactions. “Middle-office” refers to the risk management and performance attribution system, covering asset analysis, risk management, portfolio management and performance valuation. It can also perform VAR calculations, performance attribution analysis and subsequent portfolio analysis. “Back-office” covers the accounting system, including the daily accounting and generation of valuation and business reports.
Selecting the right system
To date, the overriding approach has been to source a system consistent with best market practice. As such, a handful of suppliers dominate. These include Hundsun Technologies and Shanghai Jie Software Technology for front-office investment trading systems, and Hangzhou xQuant and Sungard for middle-office risk control and performance management systems. The main back-office suppliers of valuation and accounting systems are Ysstech, Hundsun Technologies and Neusoft.
In the past, the IT departments of insurance asset management companies lacked international experience in system architecture management, and had limited knowledge of the investment process and financial instruments. Their role was often limited to carrying our basic orders and maintenance work. The outcome was that business units often took control of IT decisions including the development of core systems.
Avoiding isolation in system planning
A major issue has been the lack of communication between different business units, resulting in the isolation of system planning and a lack of synchronisation of data between the front, middle and back-office. Currently, themajor problems include: (i) a lack of integration among front office investment trading management systems; (ii) poor portfolio management systems; (iii) no linkage between front and middle-office systems; (iv) data in middle-office systems suffer from poor timeliness; (v) no mechanism for verification between front and back-office systems.
IImpact of foreign software on the market
Adding to the complexities, many foreign software developers are entering the China market, bringing more mature and integrated system solutions to China’s asset management companies and fund companies.
Companies are increasingly recognising the importance of system integration, functional improvement and data centralisation. In early 2007, for example, the foreign shareholder of Life Insurance Asset Management, MEAG MUNICH ERGO Asset Management (MEAG) sent experts to conduct on-site research.
At first, it considered recommending a China-adapted version of the industry-leading system used by MEAG.
However, after consideration of the high development and implementation costs, and the risk associated with adapting the European system to the China market, the decision was made to use one of China’s major developers.
Selecting the right model
Other domestic firms are going through the same process of selecting a system provider. From our experience, the following two models are the most frequently considered:
- Creating an interface on an existing platform. One option is to build a data layer on the firms existing platform. This involves applying predefined business logic and read data from the various systems on a daily basis to ensure integration. Although this model can achieve data integration, it can be slow and is likely to require regular maintenance at later stages as technology changes. As such, it is a model ill-equipped for a system that needs a high level of personalization.
- Upgrading the front-office, while separately deploying the middle and back-office. This model requires data from the front, middle and back-office to pass through a central interface. Such a system allows for the centralized management of frontoffice trading, as well as the analysis of transactions, position, cash and risk data in a nearreal-time situation, based on the company’s internal portfolio management requirements.
However, while this model solves many of the problems in the current systems, it does raise a new issue: how to link the valuation and (cash) account information of the back-office system to the front-office trading system.
This accuracy of data issue has proven to be an essential requirement for both the regulator and entrusting parties, so solving this problem may be the key to building a unified data platform. To reconcile data between the front and back-office systems, financial items must first be introduced in the frontoffice trading systems to allow it to link with the back-office. If different suppliers have developed these two systems, this process is unlikely to be smooth. The ideal solution, from our experience, is to ‘push’ from the back to the front – i.e. data in the front and back-office systems are integrated and preferably built from the front to back by one supplier (preferably the supplier responsible for the back-office system).
An essential process for all domestic firms
Developing an information technology platform in a market with no domestic precedent is, without a doubt, a challenge. What we have found is that drawing on the experience of our foreign shareholder, while appreciating the need to create local solutions, has been the most successful approach.
The process is not rapid and can only take place when management makes it a strong priority. It has involved a large-scale audit of our capabilities and what the regulator and our clients require. We have also seen product demonstrations by more than a dozen domestic and foreign investment software vendors. It is a process that every insurance asset management firm will need to go through in China if it wishes to flourish in this fast growing sector. But the need for a unified data platform with direct linkages between front- and back-office systems, real-time net valuation and comprehensive view of assets is essential for firms focusing on multi-asset trading and risk control and management.