Investor assurance reports can give carriers and edge

As covered in Insurance Day – 13.08.18

The increased pressure on asset managers to report on transparency, due diligence and other control measures can be used by insurers to drive better investment performance.

As some of the world’s biggest institutional investors, insurers and reinsurers have long placed significant importance on ensuring they get their invest­ment strategies right. For them, these are troubling times.

With increased economic uncertainty, geopolitical change and market competition, it is not surprising that investors are now demanding more transparency, rigor and security from those they trust with their wealth. The insurance market is no exception and, as a result, the rise in requests from new and existing investors for controls assurance reports will not have passed them by.

While these reports have proven to be an extremely valuable marketing tool, they can provide the platform and framework for a whole host of other benefits to ensure investors are satisfied and asset managers can clearly provide the evidence they have the right controls in place and are following the agreed investment strategies on behalf of their clients.

The big questions investors have increasingly been asking their asset managers is: “How do we know the figures we are being provided with in terms of value and performance are accurate and verifiable and you are con­ ducting the level of due diligence we would deem to be appropriate and agreed investment protocols are being followed?”

Insurers operate in a highly regulated environment and they are, in common with so many major investors, keen to establish what controls are in place above and beyond what would be demanded by regulations.
It is an approach that has been welcomed by many in the asset management sector, as there is a willingness to be subjected to greater scrutiny. Indeed, is it becoming a prerequisite to effective operation within the market.

More than a health check
Controls assurance reports are more than a standard “health check”. These reports provide independent assurance to investors that an organisation has robust controls in place and meets industry best practice.

There are two types of reports investment management firms may elect to commission, known as Type 1 or Type 2 reports.
Type 1 looks at the description and design of the controls in place at your business. For these reports, the reporting accountant will seek to verify the procedures and controls as de­ scribed by management have been implemented. The reporting accountants will express an opinion about whether management’s description fairly presents the service organisation’s control system and whether the controls were suitably designed.

As well as looking at control description and design, Type 2 addresses the operating effectiveness of those controls over a given period. For Type 2 reports, the reporting accountant will also seek evidence to express an opinion about whether the controls operated effectively throughout the specified period. Where exceptions have been found, such as controls not operating effectively, these will be reported.

The benefits of these reports are that, if used proactively as a marketing tool, firms can gain a competitive advantage over their rivals by being able to demonstrate the strength of their control environment, high­ lighting a commitment towards best practices.

Increasingly, this is becoming a prerequisite for doing business, particularly with US investors. However, there are also many internal benefits that can be derived from such reports if conducted and used effectively.

For insurers, risk management is at the heart of their business and controls reports can play a significant part in risk management around the delivery of services to clients. Management can gain peace of mind as to the operational effectiveness of their controls and hence their ability to provide services consistently and securely.

Service levels to investors can also be enhanced. In the wider context of the business, controls reports can provide the ability to factually measure and evaluate your investor service levels and performance, meaning root cause analysis can be performed to identify themes and to manage contractual obligations.

However, for all the benefits they can only be realised if the reports are properly understood and acted upon. There is, in my view, three approaches to these reports.

The first is to simply view the report as a box-ticking exercise and as such pay little attention to the report itself, taking the view that simply having the re­ port is sufficient.
The second approach is to sim­ply read the opinion of the auditor in the report itself.
The third approach involves reading the report from cover to cover so as to understand the contents and what it means for their business.

Clients are becoming more demanding and firms are ready and willing to offer the greater degree of assurance they seek. However, being provided with controls assurance reports is only truly effective if they are properly under­ stood, and their conclusions used to drive better performance.

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