Sarah Dudney outlines success factors critical for asset managers operating in the insurance industry

As markets gradually roll away from the near death experience of 2008, all the walking wounded in the financial services sector are currently reviewing their business models and risk management. European insurance companies are no exception. Senior executives in the European insurance sector not only have to contend with preparing their businesses for the arrival of Solvency II regulation in 2012. After the events of 2008, they also have to ask themselves: ‘is our business doing what it set out to do?’ and ‘are risk exposures fully covered?’. In this context, insurance companies are also reviewing the asset side of their business and questioning if they have sufficient in-house expertise to manage all the uncertainties that financial markets have shown capable of creating.

Many insurance companies are realising that in this challenging market, it is critical to focus on writing insurance risk and then outsource for specialist advice for their assets. Selecting an outsourcing partner is becoming a very attractive strategic option for many European insurance companies. How can institutional asset managers best capitalise on this growing trend and what do they have to offer to succeed in this sector?

A recent figure issued by Patpatia & Associates, a US specialist consultancy, estimates that insurance companies have become an important component in the European marketplace, accounting for over a quarter (27%) of all assets managed. The consultancy led pension market will always remain a dominant source of assets in Europe as a whole, but can an asset manager assume that it can ‘plug and play’ into a neighbouring institutional market? This may be a dangerous assumption. One aspect of the insurance sector which many institutional asset managers see as attractive is the high degree of direct client contact between the asset manager and insurance client, given the limited presence of investment consultants in this sector. The quality of the dialogue between insurance client and investment manager in part determines the ongoing commercial success of the asset manager in this sector.

The Patpatia & Associates analysis has identified nearly 50 European-based managers servicing insurance companies in 2008. While these have historically been primarily ad hoc efforts, the last several years have seen a number of firms establish the insurance-specific distribution and servicing channels required to successfully aggregate significant general and separate account business. According to industry figures from Patpatia & Associates, the two leading participants in this market are Deutsche Asset Management with over $190bn (€139bn) won from the sector, followed by BlackRock with over $180bn. As Patpatia’s analysis of the 50 companies evidences, there is opportunity for all types of investment manager.  This is borne out by Jayne Styles, CIO of Amlin plc, a leader in the London insurance and reinsurance market: “We select investment managers who are best in class asset specialists,” she says.

One firm that has made significant and strong progress serving the insurance asset management market is Credit Agricole Asset Management. It operates an insurance team out of its London branch with AUM of £4.7bn (€5.2bn, as at 30 November 2008) covering the Bermuda, London and European Insurance markets. Assets are predominantly fixed income denominated in US dollars, euros, sterling and Canadian dollars and the unit is led by Russell Busst. “Specialist insurance industry investment managers should display the attributes that an insurer would require of an in-house manager whilst adding the investment expertise that can only come from a global investment management house,” comments Busst, who has over 20 years of experience of working closely with insurance companies.

An insurance company, whether in Bermuda, London or Copenhagen, wants to know that it is dealing with one of its own and that it can talk to their investment manager without the need to pause for a third party technical translation. This is particularly important when defining investment strategy and assessing investment performance. The importance of the outsourced investment manager being demonstrably knowledgeable on insurance regulation and reporting has been validated in recent months. During the intense market volatility of 2008, offering immediate access to portfolio valuation reports has been critical.

Busst summarises the three critical differentiating success factors for performing in this sector as follows:

 Expertise - each function, be it portfolio management, execution, reporting or settlements, should have a full understanding of clients’ regulatory, business and operational constraints, and should incorporate that knowledge in each investment decision and operational activity; Resources - the specialist will, where required, apply additional resources required to meet insurance company operational requirements, including reporting; Investment philosophy - portfolio managers are not separated from clients by benchmarks and performance targets. Client contact should be multi-level, continuous and information flow should be bi-directional. 

One should also add that mark-to-market valuation of liabilities within insurance companies, as a result of pending Solvency II regulation, encourages total return orientation.

Resourcing for this sector is therefore regarded as important for success and has implications for talent management as well as systems and infrastructure. One European asset manager cited the costs of marketing and performing well in this sector. At the outset it needed CHF1m (€668,000) simply to develop a prototype for a reporting system for one of its target European markets. Costs of developing a fully operational technology platform which can accommodate different regulatory and language requirements can quickly escalate.

In addition, securing talented individuals who can sell their company’s intellectual capital, investment specialism and technological resource is critical. Sales professionals and investment managers need to be multi skilled and able to transact with an expert audience. The lead time for deals can be long and over night success should not be factored into sales targets.

What can insurance asset managers offer by way of product? When insurance companies embark on outsourcing arrangements they seek diversity of assets and more sophisticated competencies as the table illustrates which is based on analysis completed in the US market. It is illustrative of how risk budgets are being allocated. All asset classes including fixed income have to be managed within strict regulatory guidelines.

A clear definition of the asset manager’s value proposition is critical for managing and maintaining a successful position in this market.