European insurers may turn to a wider range of asset management strategies as they face up to difficult market conditions, write Claudio Bocci and Gianmatteo Guidetti
At a glance
• Europe’s insurance asset management market is growing at 8% a year.
• €1bn is to be invested in asset management solutions.
• The challenge is for asset managers to develop suitable products.
The relationship between institutional investors and asset managers is changing, mainly as a result of an increasingly challenging market scenario. The compelling need to broaden the investable universe towards higher-yielding asset classes and a more structured regulatory framework means investors require a larger set of skills and greater scale.
While large investors can afford to create internal capabilities and insource most of the investment process, medium and small players need to turn to external asset managers.
European insurers, which traditionally outsource a limited share of their assets, are responding by increasingly adopting asset management solutions through different approaches. One approach consists of looking for sources of yield in ‘non-core’ or illiquid asset classes that are not easily accessible. In other cases, insurers are choosing asset managers as ‘partners’ with responsibility for the whole portfolio, provided that they are able to speak the same language and supply the level of reporting needed.
Prometeia has run a survey* on asset managers that are active in the European insurance sector, to shed light on how the industry is changing to capture these trends. The report collected data and insights from 60 firms that manage, in aggregate, more than €22trn worldwide and have operational structures in Europe.
According to the findings, asset managers are operating in a European insurance market that is growing at high speed. Managers expect to grow by as much as 8% a year for the next three years.
This means that about €1trn is expected to be invested through asset management solutions in the coming years. Looking at how asset managers are positioned in the European insurance market, taking into account the size and the relevance of the insurance business within the firm, more than 70% of the market is dominated by a few large players, both captive – that is, part of a larger insurance group (39%), and non-captive (33%). What emerges is that competition is expected to increase, mainly thanks to the growing role of medium/small non-captive managers, which are growing twice as fast as captive players. Germany, France and Italy are expected to contribute the most to market growth.
The figures confirm that the asset management industry is responding to this changing environment. About 57% of asset managers have created dedicated teams to better serve insurance clients’ needs. More than 70% of these proactive players are part of insurance or banking groups, while 32% are independent players. However, there is still a long way to go.
Improving insurance-related skills is the main challenge that lies ahead for asset managers. They will have to invest in resources, dedicated tools and methodologies to master the challenges of the insurance business, to provide innovative products and to adapt the investment approach to a changing market. In particular, overcoming the lack of insurance-specific skills among independent asset managers will be crucial to bridge the gap with asset managers already serving group insurance companies.
The factors that will allow asset managers to provide value-added services to insurance companies are related to investment and execution first, followed by Solvency Capital Requirement (SCR) optimisation and strategic asset allocation. While meeting reporting standards is a pre-requisite, risk management and valuation capabilities are particularly important for alternative assets.
In terms of asset allocation, European insurance companies’ portfolios outsourced to asset managers are unsurprisingly biased towards fixed-income assets; corporate and government bonds take up 33% and 28% of the average asset allocation respectively. Alternative fixed income (consisting of bank loans, infrastructure and real estate debt) and equity assets play a marginal role, both representing less than 10% of total portfolio allocation, partly because they are generally penalised by higher capital charges under Solvency II.
There are, however, considerable differences among countries in term of asset allocation. French asset managers are pioneers in investing in alternatives, with portfolio allocations to those assets higher than 14%, while Italian and German managers are still almost entirely allocated to fixed-income assets (70% plus).
The new trend generating asset manager interest is the strengthening of alternative approaches to fixed income. Investors’ interest is expected to be mainly focused on corporate high yield (20%) and alternative fixed income (29%), according to Prometeia’s survey. Liquid alternatives (9%) and multi-asset fixed-income strategies (10%) are also expected to attract investors’ interest.
An important issue at stake is the development of the product offering that can match specific insurance needs. Some 60% of surveyed managers offer at least one ‘Solvency II friendly’ strategy and an additional 15% are working on one. Being able to deliver performance in capital-adjusted terms will also be a key element to success.
Given the market scenario, the main challenges for investors will be to increase portfolio diversification while ensuring returns, and to manage overall portfolio volatility, taking into account the capital requirements.
On the one hand, allocating part of the portfolio to alternative assets to generate long-term uncorrelated returns is seen as a viable solution by many investors. However, developing optimised product solutions that take into account regulatory changes is necessary to achieve superior risk-adjusted returns. Both of these services are and will be in demand by investors and represent a unique opportunity to boost the asset management industry. Asset managers are ready to take full advantage of the opportunity.
Claudio Bocci is the head of the asset management practice and Gianmatteo Guidetti is a manager at Prometeia, a financial consulting and economic research company based in Italy
*The survey is available at www.prometeia.it/en/AM-insurance-market-survey