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In recent years, uncertain economic and political environments have made people reticent about investing. And when they do invest, buyers are looking for the best value for their money. They are less inclined to pay fees for active fund management than in the past, and therefore increasingly favour passive funds. At the same time, buyers are looking for a high level of customisation and investments that perfectly match their individual investor profile, a costly trend for asset managers.

In addition, the asset management industry has found itself under stricter scrutiny from regulators and has had to become much more disciplined. Remaining compliant and keeping up with the developments required by new regulations requires significant resources, adding up to the cost of running an asset management firm.

These issues are feeding into another major industry dynamic, technology driven disruption. New technologies have enabled new aggressive competitors, digital players with lower overheads, to make waves in the market. Incumbent players are also investing heavily in technology platforms designed to lower the cost of servicing an increasingly time starved and tech savvy clientele. Asset managers adopting these new business models are reaping efficiency gains but are also facing new operational risks –relating to technology and the increased amount of data collected and stored by their operations.

Managing costs, both to remain competitive and to increase profit margins has become essential for asset managers. In fact, the results from a survey carried out by Ernst & Young, comparing the views of Chief Risk Officers, Heads of Operational Risk, Legal and Chief Compliance Officers from some of the most recognised wealth and asset managers in Europe, highlighted the fact that rationalising operations remained one of the five most important steps that firms needed to take to move forward.

Senior managers whose firm had adopted cost-cutting measures since the financial crisis named several of those strategies, which tend to fall within the four following categories:

  • Reappraising product ranges
  • Developing common solutions to critical processes
  • Deepening outsourcing routes in the middle-office or front-office support
  • Exploring innovative cost reduction solutions with providers

While the strategies mentioned allow companies to better manage their costs and to increase efficiency, often they result in additional risk for the organisation. For instance outsourcing has long been identified as an effective means of exporting costs, at the price of importing operational risk .

The survey also presented a number of risk categories that “keep CROs awake at night” and showed that operational risk has become a real concern for asset managers. “Pure operational risk” came first, mentioned by 93% percent of respondents to the survey; several other categories directly related with operational risk were also mentioned, such as regulatory risk, conduct risk, outsourcing risk or tech/data risk. These concerns have been reflected in capital requirements with operational risk being the primary driver for many asset managers.

In order to address those risks properly, asset managers must have a strong risk control framework in place. Given the potential for severe loss events, effective targeted insurance has a critical role to play as part of every firm’s risk management.

In addition to shielding the firm from unexpected major losses, a well-designed operational risk insurance policy can help asset managers secure the benefits of new initiatives to achieve greater efficiency.

Operational risk insurance can:

  • Be a cost effective addition to regulatory capital
  • Can help firms reap the benefits of expense management initiatives, such as outsourcing back office functions, by transferring associated operational risks
  • Reduce the risk of adopting new business models

In the current environment of low rates and complex regulatory requirements, efficiency has become key for asset managers, which often results in increased operational risks. Investment professionals should talk to their brokers to see if operational risk insurance is relevant for their operations and look for a cover managed by a carrier with sufficient strength and capacity.

About the author

Angelos Deftereos is a Senior Underwriter for Operational Risks, International Financial Lines at XL Catlin. He can be reached at  angelos.deftereos@xlcatlin.com

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Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

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