This document discusses the considerations for insurance companies in outsourcing their general investment account (GIA) accounting functions. It explores the unique requirements of GIA accounting, including complex assets, multi-basis accounting, statutory reporting, and SOX compliance. When making the outsourcing decision, all current processes must be well-documented and understood. The potential benefits of outsourcing include cost savings and efficiency gains, but it also brings new risks that require oversight. The document analyzes the pros and cons of outsourcing GIA accounting functions.

1. OUTSOURCING YOUR GIA
ACCOUNTING
Important considerations for a complex decision
Outsourcing, or shifting a company’s
business processes to an outside provider that
specializes in a particular service or services,
is done across many industries and for a
multitude of functions.
This white paper explores the pros and cons
of outsourcing the accounting and reporting
functions for general investment account
(GIA) assets of insurance companies.

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O
utsourcing, or shifting a company’s business processes
to an outside provider that specializes in a particular service or services, is done across many
industries and for a multitude of functions. The advantages of outsourcing are numerous and
can include, but are not limited to:
> Enhancing service quality
> Reducing dependence on internal IT infrastructure
> Adding scalability
> Reducing labor costs
Today, Finance and Accounting Outsourcing (FAO) is growing within asset management and insurance
companies. However, the decision to outsource is an extremely difficult one to make because of the
complexities and risks surrounding insurance assets. In this article we will explore the pros and cons of
outsourcing the accounting and reporting functions for general investment account (GIA) assets of
insurance companies.
“. . . the decision to outsource is an extremely difficult one to make because of the
complexities and risks surrounding insurance assets.”
INTRODUCTION

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There are many unique requirements surrounding the accounting and reporting of
GIA assets. GIA refers to the combined, or aggregate, investments and other assets of an insurance
company available to pay claims and benefits to which insureds or policyholders are entitled. The
general account may also be considered everything that is not represented by separate accounts of the firm,
if such a separate account has been established by the company.
Below are just a few of the unique requirements of GIA accounting. These are typically not present for
asset managers and other financial institutions.
1. Complex fixed income securities, derivatives and alternative assets
According to a survey conducted at the 2015 Insurance Accounting and Systems Association annual
conference, three-quarters of insurers view complex asset class investing, and the ability to efficiently
manage its risk and operation, as a competitive advantage. Investing in complex or non-traditional asset
classes such as syndicated bank loans, derivatives, private equity and hedge funds, etc., is a strategy designed
to help maximize portfolio returns in a sustained period of record low interest rates and yields. As a result,
mounting asset complexity can also increase a firm’s operational costs. Investment accounting platforms
must be more robust and capable of handling these complex asset classes. Trading, accounting, reporting
and data platforms must all be able to process these complex assets. Upgrading the in-house technology
may be cost prohibited relative to assets under management. An alternative solution can be outsourcing.
“Three-quarters of insurers view complex asset class investing and the ability to
efficiently manage its risk and operation as a competitive advantage.”
2. Multi-Basis Accounting
Insurance accounting platforms must be able to handle multiple bases of accounting for statutory (STAT),
Generally Accepted Accounting Principles (GAAP), tax and management reporting. Insurers may also have
the need for International Financial Reporting Standards (IFRS) reporting. Keeping systems current to
meet accounting and reporting requirements is a constant process. Vendors routinely provide upgrades
and enhancement to applications. Outsourcing can shift that responsibility to the provider; however,
the provider must have its own accounting experts to understand new pronouncements and changes in
accounting.
UNIQUE REQUIREMENTS OF GIA ACCOUNTING & REPORTING

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3. Statutory Reporting
In the U.S., STAT reporting is governed by the National Accounting Insurance Commission (NAIC). The
regulations are extremely complex and constantly changing. Because these reporting regulations are
unique to insurers, many investment platform vendors do not have this accounting basis or STAT
reporting capability. As a result, the number of application and outsourcing vendors that provide this
capability is limited compared to the number available to other asset managers and financial institutions
that do not require STAT accounting. It is then necessary to select an outsourcing provider that will be
current on the latest accounting guidelines and regulations.
4. Sarbanes Oxley (SOX) Compliance
The Sarbanes Oxley Act of 2002 requires that the CEO and CFO of an organization certify and assert to
stakeholders that SEC disclosures, including the financial statements of the company and all supplemental
disclosures, are truthful and reliable. They also require that management has taken appropriate steps to
show that the disclosure processes and controls in the company they oversee are capable of consistently
producing financial information upon which stakeholders can rely. The company’s external auditor must
report on the reliability of management’s assessment of internal controls.
In deciding whether or not to outsource investment accounting and reporting, the company must assess
two things. First, does the vendor have adequate processes and controls in place, and second, does the
insurer have controls to oversee and rely on the vendor for those processes that have been outsourced?
“ It is then necessary to select an outsourcing provider that will be current on the
latest accounting guidelines and regulations.”
UNIQUE REQUIREMENTS OF GIA ACCOUNTING & REPORTING

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THE DECISION
Before outsourcing a process or a set of processes, finance executives
should conduct four different, but frequently overlapping, evaluations to ensure that the outsourcing
decision — whether positive or negative — will align with corporate strategy, objectives, capabilities and plans:
1. Identifying the company-specific strategic drivers for the outsourcing decision is essential to ensure
everyone is “on the same page” throughout the process.
2. Evaluating the full range of options includes consideration of shared services arrangements, as well as all
potential “sourcing” and “shoring” possibilities.
3. Assessing the internal capabilities of each sourcing option must include an honest evaluation of systems
and controls, as well as the skills necessary to transfer and effectively manage the outsourced process or
processes.
4. Determining the scope and logic is an essential element of building and finalizing the business case for
any outsourcing decision.
“When making the outsourcing decision, it is extremely import that all processes and
functions be well-understood and documented as they exist today. “
One of the first steps is to identify which function, or functions, could potentially be outsourced. A strategic
review of the investment operations, accounting and reporting the GIA should be conducted. When making
the outsourcing decision, it is extremely import that all processes and functions be well-understood and
documented as they exist today. Documentation of current-state processes varies from insurer to insurer,
so this may be a big effort to complete. However, it is critical to have a comprehensive understanding of
process flows, data flows and controls. Once this is completed, this inventory of processes will help define
the scope of the outsourcing arrangement.
The team needs to estimate the baseline costs of the current process in order to compare with costs
submitted by proposed vendors. The next step is to create a comprehensive request for proposal (RFP)
targeted for a select group of investment outsourcing service providers.

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ASSESSING THE PROS & CONS OF OUTSOURCING
The team making the decision whether or not to outsource usually consists of the
CFO, Controller, Finance and Accounting managers. It will also include representation from Investment
Operations, Treasury, Tax, Compliance and IT. Additionally, Portfolio Management will need to be
involved and understand how outsourcing will impact the front office. They all have critical decisions about
the proposed solutions impacting their functions.
Moving in-house functions to an outside provider can result in more efficiency and cost savings, but it will
pose new risks and require new oversight. The decisions will determine which functions, and to what
degree, functions will be outsourced. While a provider may have the capability to perform many functions,
there may be special expertise or unique requirements that can be better processed in-house.
Outsourcing is often undertaken to provide enterprises with a competitive advantage by delegating business
processes to external agencies and realizing the benefits of lower labor costs, better quality, and improved
innovation. While this provides a good picture of the fair side of the coin, most managers grapple with the
possible shortcoming of the process and the corresponding impact on the company’s core processes. To best
analyze the opportunities presented, it is essential to reflect upon the advantages versus the disadvantages
of outsourcing.
“Moving in-house functions to an outside provider can result in more efficiency and cost
savings, but it will pose new risks and require new oversight. The decisions will determine
which functions and to what degree functions will be outsourced.”

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ASSESSING THE PROS & CONS OF OUTSOURCING
The pros of outsourcing
The pros of outsourcing most often cited by enterprises across industries include:
> Better revenue realization and enhanced returns on investment
> Lower labor cost and increased realization of economics of scale
> Improved innovation through access to a specific knowledge base
> More time-responsive commitment to staying current on the latest accounting
guidelines and regulations
> Freeing up of management time, enabling insurer to focus on core competencies while
not being concerned about outsourced routine activities
> Increases speed and the quality of delivery of outsourced activities
The cons of outsourcing
The following possible disadvantages must be weighed against the pros of outsourcing prior to any decision
being finalized:
> Possible loss of control over a company’s business processes
> Problems related to quality and turnaround time
> Risk that provider does not have the capability to handle new and complex financial instruments
> Sluggish response times coupled with slow issue resolutions
> Shortcomings in performance versus expectations
> Lower than expected realization of benefits and results

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THE PROVIDER
The success of the process of selecting an outsourcing provider depends largely on the
rigor and comprehensiveness of the outsourcing decision making process that led to the search.
An effective decision making process will highlight important issues that need to be examined in the selection
process. For example, if an assessment of internal capabilities reveals that a company does not possess
sufficient expertise and resources to manage the transition of multiple processes to an external provider, the
search should extend to prospective outsourcing partners who possess that capability.
Many other considerations need to be addressed during the selection process if it is to result in a successful
choice and a beneficial relationship. Those considerations and needs must be prioritized and communicated,
usually through an RFP, in a way that enables the individual or team responsible for the selection to
understand and compare the merits of proposals by potential outsourcing providers with the greatest
possible consistency.
The need to prioritize selection criteria and to conduct thorough due diligence exists even when a company
seeks to outsource a single finance and accounting process.
The following key criteria should be used while comparing and analyzing prospective outsourcing partners:
> Size of the outsourcing provider. Will the insurer enhance its chances of receiving excellent service by
“making sure that we weren’t the biggest fish in the pond or the littlest fish in the pond” compared to the
rest of the provider’s customers?
> Reliability and flexibility. Can the outsourcing provider continue to deliver service if the insurer
encountered any major systems issues, entered into any mergers or acquisitions, or converted to a new
investment system? Similarly, if significant external changes occurred, such as a major regulatory change,
assurances that the provider is fully capable of accommodating any programming or staffing changes
that might become necessary must be made.
> Quality of work output. This factor, of course, represents a priority in every selection process. Quality is
typically evaluated by speaking with current customers.
“The need to prioritize selection criteria and to conduct thorough due
diligence exists even when a company seeks to outsource a single finance and
accounting process.”

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Once the documentation from the decision-making stage has been completed and reviewed, the selection
process should begin with the following steps:
1. Create a project team responsible for guiding the selection process and for making the final selection
decision (or recommendation, if the decision requires approval from a higher-ranking executive or the board
of directors);
2. Consider hiring an outsourcing advisor (i.e., consultants and/or lawyers with extensive knowledge of
and experience with outsourcing selection, agreements and relationships) to assist with the selection of an
outsourcing provider and the subsequent negotiation process;
3. Develop and distribute RFPs and, in some cases (often when multiple processes are involved), requests
for information (RFIs);
4. Establish a process to review RFPs and/or RFIs (including a standard approach to responding to
questions from prospective vendors during the selection phase) and conducting that review; and
5. Conduct additional due diligence that may include site visits to a prospective outsourcing provider’s
location, presentations by outsourcing providers and calls to outsourcing providers’ current customers or
references.
“Negotiations can result in significant reductions in projected fees of the leading vendors
after initial costs come in. Vendors are very competitive on fees because these are multi-year
contacts and they are constantly trying to expand their market share of AUM and their
own capacity for scalability.”
Managing the RFP process includes calls with vendors to clarify scope, the evaluation and scoring of
responses, vendor meetings and demonstrations, vendor reference checks and the identification of primary
and back-up vendors with a detailed analysis of the relative strengths and relevant factors behind the
recommendation.
Negotiations can result in significant reductions in projected fees of the leading vendors after initial costs
come in. Vendors are very competitive on fees because these are multi-year contacts and they are constantly
trying to expand their market share of AUM and their own capacity for scalability.
THE PROVIDER

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According to The Wall Street Journal, as many as one-third of selection teams decided
to keep their processes in-house even after investing significant time and money in evaluating potential
providers. They did this because the teams decided that their companies were not prepared for the magnitude
of change required by a transition to an outsourcing relationship.
Underestimating the amount of resources, energy, and time that change management activities
require represents one of the most commonly reported pitfalls of outsourcing relationships. The
primary reason that outsourcing providers can execute finance and accounting processes — particularly
transactional activities — more efficiently than the outsourcing buyer, is because the provider executes
the process differently. This difference requires employees with the company investing in the outsourcing
services to interact with the outsourced processes (and the outsourcing provider’s workforce) in different
ways. In other words, it requires employees to change.
How well an outsourcing arrangement successfully deals with that need to change depends on the parameters
governing the outsourcing relationship. Those parameters, including change-management considerations,
are established during the contract negotiations and continue until the agreement ends at a predetermined
date (or earlier if one of the parties exercises the early termination clause).
Contract negotiations should take the following into consideration:
> The Service Level Agreement (SLA) is the culmination of the vendor selection process and the beginning
of the ongoing management of the outsourcing relationship.
> The transfer of process and knowledge to the outsourcing provider is a major change initiative that
requires significant project management expertise to clarify roles and responsibilities and to establish
key milestones and deadlines.
> Active involvement and monitoring of both qualitative and quantitative characteristics are critical to
the successful management of outsourcing performance.
> Long lead times and the potential impact on the organization of “repatriating” or moving previously
outsourced processes to a new provider requires anticipating and articulating provisions for renewal,
renegotiation or termination in the outsourcing contract.
How an outsourcing buyer evaluates potential providers, cements the union, and then manages the
relationship moving forward, is frequently compared to a marriage. The parallel is useful to keep in mind;
the success of an outsourcing relationship, like the success of a marriage, hinges on the quality and flow of
communication between two distinct entities, as well as both parties’ ability to work together to resolve
problems and improve the relationship over time.
THE RELATIONSHIP

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CONCLUSION
About the Author
Rich Lawrence is an experienced executive with 20+ years of hands-on work in investment accounting, reporting
and operations. He consulted on numerous investment platform implementations for large global insurance clients.
Rich headed securities operations for CIGNA for seven years, and then investment accounting and reporting for The
Hartford. At CIGNA he successfully outsourced the investment operations and accounting to State Street Bank.
He is currently engaged on a major finance transformation and investment platform conversion for a large mutual
insurance client.
About InvestTech
InvestTech is the leading investment systems and operations consulting firm in North America that focuses exclusively on buy-
side asset managers. Founded in 1993, we are dedicated to bridging the gap between the business and technology needs of global
investment firms. We have successfully completed 400+ engagements for many of the world’s largest asset managers, including
pension funds, investment managers, hedge funds and insurance companies. Headquartered in Los Angeles, we have offices in Boston,
Atlanta, New York, and Toronto.
If you would like to learn more about how InvestTech can put our knowledge and expertise to work to solve your next investment
systems challenge, please contact us at 877.559.6077 or visit our website at www.investtechsystems.com.
Outsourcing should be of significant interest to finance and accounting
professionals due to the discipline’s growing use, its risks and benefits, and its growing importance to a
finance and accounting department. The industry has matured significantly over the past several years,
capabilities have expanded, and outsourcing providers for insurance companies have greatly enhanced their
expertise.
Insurers routinely ask themselves the question, “Should we outsource our investment accounting
function?” In order to answer this question, the organization must do a thorough analysis of its current
investment accounting and reporting operations. It must honestly ask itself if the organization is committed
and capable of handling the magnitude of the change. If so, it can continue through the decision process.
The decision to outsource the investment accounting for GIA assets is complicated, but depending on the
organization’s current state and long term strategy, it may be the best solution. Whether the decision is
to change or not, the decision process, if done thoroughly, will provide new insight into the organization’s
investment accounting capabilities, costs, risks, and controls.
Because this is such an important exercise, many insurers are utilizing outside consultants to develop
an overall investment accounting and operating strategy. Consultants have the expertise to help complete
an assessment of your current state, knowledge of the outsourcing vendor and solutions, and resources
available to execute the outsourcing project. InvestTech, the leading investment systems and operations
consulting firm in North America, understands the intricacies of outsourcing and can help your
company through the process from start to finish.