@Conning.
As the evolution in capital markets, regulations and stakeholder requirements increases the complexity of insurance company general account management, insurers have also been making their investment programs more sophisticated. These are some of the reasons insurers have continued to grow their relationships with third-party asset managers.
Conning suggests the outsourcing trend will continue to grow. However, insurers’ demands are changing: they want asset managers to go beyond simply looking for competitive return streams. They want managers to provide customised strategies and unique capital-efficient structures and become true business partners. Insurers are measuring outsourcing success by how it helps them manage efficient investment programs with diversified investment strategies that provide competitive returns, allowing them to free up resources to develop other valuable business capabilities.
Outsourcing can often be cheaper than developing in-house solutions and may allow companies access to additional resources and investment opportunities. As insurers continue to diversify their investment portfolios, sourcing unique investment strategies with managers who have expertise is critical. Insurers can and do build teams to manage certain strategies, but the required scale and cost may be excessive for medium and smaller insurers.
Some companies may be able to manage a high-quality fixed income portfolio with internal resources, and these portfolios might be concentrated in one or two high-quality sectors. However, insurers diversifying into other markets will require greater specialisation and resources. For instance, structured securities require specific skills and tools to properly assess collateral performance and cash-flow sensitivity.
Again, the costs of supporting this expanded skill set may be too much for smaller firms; engaging with a third-party manager may be more efficient.
The article includes a case study that helps illustrate how by allowing for an expanded array of investment types and sectors, insurers may improve their chances of achieving investment program goals. Higher levels of income, better downside protection and enhanced capital efficiency could all be achieved with more diversified portfolios.
Conning also suggests that an intangible peace of mind comes from partnering with the right asset manager. Insurers seeking these benefits should look for an asset manager who understands the specific needs of insurers, has extensive experience in modelling portfolios as well as specialty asset classes, and also has a high level of client service to address day-to-day questions and develop new ideas to optimise performance.
