Outsourcing of asset management by insurers is gaining
pace in the US, spurred on by a need to cut costs and a recognition
by many that they lack the expertise required. David Holmes of
outsourcing advisory firm Eager, Davis & Holmes provides
Charles Davis with an insight into current trends.
Go deeper with GlobalData
More insurers than ever before are
outsourcing management of their general account investments to
third party investment managers, according to a report from the
Insurance Asset Outsourcing Exchange.
North American insurance companies
decided to outsource investing in increasing numbers last year, a
trend that followed massive insurer investment losses during the
financial meltdown of 2007-2008, David Holmes, a partner in
consulting firm of Eager, Davis & Holmes, told
LII.
Holmes, who consults with money managers looking to expand
their share of the insurance outsourcing business, said the credit
crisis and insurer investment losses have clearly fuelled the
trend.
“Prior to the credit crisis,
outsourcing was certainly moving in that direction, but at a slower
pace,” Holmes says. “Firms were recognising that they needed
expertise they didn’t have in-house, specifically in fixed-income,
and then the credit crisis comes along, and the markets really get
volatile and risk profiles grew so much more complicated, and so we
saw a real spike in late-2008 and again in 2009 and 2010.”
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By GlobalDataWhile insurers have always focused
on risk management, most of that emphasis has been on the liability
portion of their balance sheet.Insurers have tended not to put the
same level of emphasis on risk management on the asset side. That’s
changing, with greater emphasis being placed on asset
management.
Insurers are continuing to question
whether they have the internal expertise and knowledge to navigate
the financial markets, said Holmes, whose firm tracks third-party
insurance money management placements. And even if they do have the
resources, insurers are questioning the need for reallocating
investment positions to other core competencies.
“There is a growing recognition
among insurers that the investment side requires greater expertise
and more detailed analysis than ever before,” Holmes says.
“In-house management commands resources, and those needs grow as
the insurer’s asset base grows.”
Insurers have traditionally
invested in high-grade fixed income, a sector that historically
provided stable returns. The market chaos exposed significant risks
that many were not equipped to manage, causing insurers to examine
whether they should outsource. A sector of the market once taken
for granted today demands full-time attention.
The report finds a record 290
investment mandates were outsourced in 2010, up from 256 in 2009
and 149 in 2008. However, fewer large multi-billion dollar mandates
were outsourced in 2010, causing lower asset totals in 2010
relative to 2009.
“Difficult financial markets as
well as the slow economy continue to challenge insurance companies’
earnings,” Holmes says. “They have become more open to the notion
that the outside expertise and resources of an investment manager
or consultant can make a difference.”
Asset classes and investment styles
which saw increased outsourcing in 2010 include core and core plus
fixed income and short duration/cash mandates. New manager hires
were down in specialised fixed income mandates such as bank loans
and asset-backed securities.
“Core fixed income is the staple of
insurance asset investing,” Holmes says. “Increased outsourcing to
specialised mandates reported to our database in 2009 was not fully
sustained in 2010. It was at least partly opportunistic.”
The report also finds that the
asset value of new mandates outsourced from life and health
companies exceeded those from property and casualty companies for
the first time in 2010.
“Asset outsourcing is historically
more frequent among property/casualty companies,” explains Holmes.
“The life and health companies are typically larger, and larger
insurance companies are beginning to outsource to third party
investment managers more often.”
Not only are the outsourcing
numbers spiking, but larger insurers – those with more than $5bn in
assets – are joining their smaller counterparts in outsourcing
investment management, Holmes said. Larger companies are
outsourcing portions of their portfolio in a strategic move aimed
at gaining broader perspective from money managers.
“The 80-20 rule certainly applies
to the insurance industry, so you are never going to see some of
the larger players outsource all their assets because they have the
capacity in-house, but we still are seeing more outsourcing in that
part of the market,” he says. “The bulk of their assets are in
fixed-income, with equities diversifying risk, so they face the
same realities as smaller players.”
Holmes said that outsourcing makes
sense because it allows insurers to focus on underwriting and
sales.
“They get access to thought
leadership they otherwise might not see, as the investment managers
have much broader expertise in the market, and the insurers gain
the ability to get multiple perspectives,” he says. “It allows them
to achieve economies of scale, as they no longer need credit
analysts and other investment professionals in-house. And it allows
the insurers to focus on underwriting and other core competencies,
including risk management and sales.”
Holmes said the trend should
continue in 2011 as insurers realise that investing financial
assets has become more complicated. Insurers need to spend more
time than ever on business growth, customer retention and risk
management in these tumultuous times. Outsourcing also allows
insurers to maximise liquidity, a key concern for the life industry
and a time-consuming task in and of itself.
“It’s just more difficult to focus on core competencies when you
have to spend so much more time on the investment management side,”
he says. “It’s getting easier for the larger insurers to see the
benefits of investment outsourcing.”
