Portfolio management in insurance

By grouping multiple risks into portfolio’s, data can be profiled, modelled, and analysed at various levels of granularity to help drive focus and activity needed to support the organisation’s business plans. Portfolio management is typically a bottom-up process that identifies the tactical actions required to achieve the insurers strategic goals.

Why is Portfolio Management important?

What constitutes a portfolio will differ from insurer to insurer, it will largely depend on the size of the insurers book of business and how it aligns itself internally in terms of Profit and Loss responsibilities. Being able to compartmentalise a book of insurance business into discrete portfolios and performance drivers has a direct correlation on the ability to take specific tactical actions that support delivery of the overall business plan.

Historically portfolio management within the insurance industry has been a slow, backward-looking and reactive process.

What does effective Portfolio Management look like?

Effective portfolio management starts with a clear and defined strategy that is well communicated and understood across the organisation. This should include a known target business mix that can be monitored continuously across a range of performance metrics and modelled and analysed for future profitable business opportunities.  

Each portfolio will have its own strategy that once combined across the portfolios deliver the organisation’s business plan. The granularity of data will also differ across each portfolio and is a major determinant of the quality of portfolio analysis. Material data gaps that constrain the insurer’s ability to effectively analyse the portfolio should be a focus area for continued investment and improvement.

Portfolio management is a collaborative effort across the underwriting, pricing, reserving, exposure management, capital management and actuarial functions. Effective portfolio management capabilities rely on being able to quickly spot deviations from the portfolio plan, analyse the drivers of the deviation and then implement corrective actions to address underperformance. Equally, effective portfolio management will support portfolio steering, enabling the insurer to identify opportunities to outperform the business plan through profitable growth in portfolios when market conditions are strong.

The insurance industry is starting to see real step changes in portfolio management capabilities. New data sources and new data science techniques are rapidly evolving, coupled with more advanced risk intelligence and increasing digitalisation. Leveraging these new sources and techniques, and adoption of high-impact visualisation tools supported by narrative (the story telling behind the data and trends), enables faster decision making and action deployment. Effective portfolio management is now essential for achieving competitive edge and the ability to outperform peers.  

A 2020 collaborative study by Lloyds and Willis Towers Watson identified that for Lloyd’s syndicates specifically, the performance gap between those syndicates assessed as being in the top quartile for portfolio management capability, versus those assessed as being in the bottom quartile was an impressive eight percentage points. 

Summary

Effective portfolio management is a framework for proactively identifying performance issues within a portfolio, understanding the drivers of the underperformance, followed by the ability to quickly execute tactical actions to improve profitability whilst at the same time being able to identify opportunities for profitable growth.

It is a forward-looking process to identify emerging trends and predict where there might be changes in assumptions on how the market and risks are developing compared to those that were made at the time the business plan was set.