Insurers in Europe continue to simplify and consolidate their asset manager relationships, a study has found.
Connor Bigland, research analyst, institutional at Cerulli, explained to Expert Investor that lower profit is driving this development.
“The market environment (low interest rates) and the regulatory environment (Solvency II) act together to squeeze insurers’ investment returns, forcing them to seek operational efficiencies by managing fewer third-party asset manager relationships.
“Instead insurers are moving towards a strategic partnership model with asset managers, where they hand over larger mandates and in turn receive reduced fees, often in tandem with holistic asset management services such as Solvency II optimisation and reporting, and asset liability management services,” he said.
Over the next 12 to 24 months, 25% of all insurers surveyed by US research firm Cerulli plan to reduce the number of external asset managers they use.
In addition, 41.7% of respondents plan to increase their outsourcing of core fixed-income portfolios to third-party managers over the next three to five years (see graph below).
This will lead to intensifying competition between managers for fewer but larger mandates.
Those that offer services that simplify investment management and reporting will have an edge, the study said.
Cerulli believes that captive managers will be the main beneficiaries from insurers outsourcing core portfolios.
Their expertise in insurance solutions, such as solvency optimisation, makes them well-positioned to gain these inflows.
Additionally, environmental, social and governance (ESG) is highly valued by insurers and a strategic focus for all of the European captive managers that are part of the world’s largest 50 asset managers, the study said.
It also found that “reporting and ESG capabilities are the new differentiating factors, and managers with the simplest and highest-quality reporting and ESG capabilities will attract the most attention from insurance asset owners” (see graph below).
Managers should, therefore, pay greater attention to their reporting capabilities and ESG integration.
Bigland commented: “Emerging trends such as ESG investing are now better differentiators than traditional Solvency II solutions or capital optimisation.”
Managers providing platforms that are specifically targeted at insurers will be able to compete effectively for assets during this period of consolidation, the research firm said.
Platforms offering a “one-stop shop” for investment capabilities and a usable interface for clients to interact with, and those with reporting, risk management, and advisory services, will likely gain most assets from smaller insurers.
As of December 2017, European insurer-owned asset managers represented 10% of assets under management of the world’s 50 largest asset managers. This fell to 7% by December 2019 (see graph below).
On average, the non-captive asset managers in Cerulli’s list of the 50 largest global asset managers grew at a CAGR of 8.4% in the three years to 2019, compared to an average of 5.7% for European insurer-owned managers.
A total of 120 European insurance companies, representing more than €6trn of European insurance investment assets, completed the insurer survey between March and April 2020.
Of the respondents, 25.0% were UK insurers, 25.0% French, 25.0% German, 12.5% Italian, 6.5% Dutch and 6.0% were Belgian, Cerulli said.