What (if any) lessons can Turkey draw from European insurers?
What can Turkey learn from the critical business issues of European insurers? Are there parallels with Turkish domestic insurers?
The European market is not the easiest to operate in primarily because of low yields and increasing capital requirements. For example, Solvency II has reduced the scope of investible instruments (in reality equities are consuming too much capital). As a result, many insurers have found it difficult to manage their liabilities i.e. achieve the guaranteed returns promised to their policy holders. This explains two trends. Firstly the shift to selling unit linked products. Secondly selling life portfolios to private equity firms who subsequently run off these liabilities by changing investment strategies to invest in alternatives and attain higher yields to meet these liabilities. From discussions with the panel and audience it was clear that the first trend has already found its way to Turkey and it will be no surprise if the second arrives soon.
European insurers are being forced to accelerate their digital journey. There are two main drivers. Firstly, legacy systems impacting front and middle office performance and the ability to meet regulatory reporting requirements. IFRS 17 is not yet in force but is likely to require major adjustments to existing systems - potentially even greater than those required for Solvency II. Secondly, distribution channels are becoming more digitized which requires turning complex data into smart and actionable information for decision-making. Financial services regulation is taken seriously in Turkey, and reference was made to it throughout the conference.
The benefits of post-trade solutions
Many European insurers use post-trade services to find solutions to their challenges. How can post-trade services help the Turkish market?
Unmatched assets & investors’ protection: In Turkey, custody services are considered part of trading services for most asset owners (insurers, pension funds, official institutions). This may be viable today considering the limited types of asset in which they invest. However, there is a great deal of value for an insurer in using a custodian for all their assets even if the only security class they invest in is government bonds. With the correct set-up and provider, a custodian ensures the safety of the assets and that trades settle on time with little operational work for the insurer. Further, the insurer receives periodic reports on assets under custody, is reminded about income to be received on assets.
If you are certain about asset safety, you can focus more easily on your core competencies i.e. yield enhancement and managing risks directly related to your business. This is actually where post-trade service providers create value in general.
Multi asset solutions – beyond custody: I have to admit that it is true that the value of a custodian is more visible when your investment scope is more complex. And I understand that this is where the Turkish market wants to move in coming years. For example, cross-border investment requires the safety and expertise of a global custodian. Using a “brokerage-only” solution to invest in global markets is usually not safe enough for a regulated asset owner like an insurer, pension fund or an official institution.
Next generation outsourcing solutions & advanced collateral management services: Perhaps the most important support post-trade service providers can give to asset owners is outsourcing solutions. In today’s environment where cost efficiency is key, it makes more sense to outsource as much as possible instead of investing in expensive IT systems and specialized teams. This extends even to collateral management solutions for the needs that emerge when connecting with CCPs in the new risk driven world.
Enhanced risk adjusted returns: Then, a custodian usually helps asset owners to enhance their risk adjusted returns with solutions such as securities lending, of course when allowed by the regulator. Credit and financing solutions come hand in hand with custodial services, especially when the post trade provider is a fully fledged bank.
Advanced data & reporting solution: Lastly, prominent post trade providers have been transforming themselves to match the needs of the new world of data, technology and ESG. We believe that there will be more areas for collaboration. The interaction of custodian banks with FinTech companies is one angle to mention.
In summary, I recommend that for any step towards diversifying your investor base, that your strategic discussions include a post-trade expert in addition to an executing counterparty or asset manager. That’s where you are more likely to find the innovative ideas that you are seeking.