Insurance Asset Management – A Global Opportunity

Over the last 18 months, a number of our clients have expressed an interest in building their Insurance client groups. In this short note, we consider the specific opportunity and factors for success that Asset Managers must navigate, as well as their implications from a human capital perspective.

The Opportunity

According to a survey of 248 Insurance Companies by the Economist Intelligence Unit, Global Insurance AUM is estimated at US $6.5trn. Unsurprisingly, given the size of the market, Asset Managers have redoubled their interest in a client base with perceived untapped potential.

The Regulatory Context

Following the global financial crisis, increased regulatory capital requirements have forced both Banks and Insurers to consider liquidity and potential balance sheet risk. Impacted by becoming Solvency II compliant, Insurers are increasingly turning to Asset Managers to help manage pressure on liability valuations and the consequent risk-based capital requirements. The Macro Economic backdrop of depressed interest rate yields and market volatility has created an increased premium on alpha generation alongside liability management (ALM).

Specific Industry Challenges and Responses

Highlighted below are some of the key challenges faced by Insurers as well as some of the designated responses and asset management solutions to date.

  • Insurance challenge - Search for capital efficient yield through alternative asset classes.
  • Response - Commercial real estate loans, infrastructure, multi-asset funds, high yield.
  • Insurance challenge - Search for capital efficient yield through ALM.
  • Response - Matching Adjustment plus cashflow matching. Volatility Adjustment plus asset re-allocation, basis risk hedging.
  • Insurance challenge - Increased use of capital efficient assets.
  • Response - More multi-asset funds. Less securitisations, private equity, equity release.
  • Insurance challenge - The need to proactively hedge and de-risk.
  • Response - Increased use of static and dynamic hedging ALM programmes. Matching Adjustment as well as “Buy and Maintain”.

Business Requirements for Success

What do Asset Management firms needs in order to add value to their Insurance clients?

Some factors include:

  • Asset class capabilities including a range of alternative/specialist asset classes - Asset Managers able to provide a breadth of product spanning both low cost passive, LDI and alpha generating strategies, including alternatives, have been winners. Those without such breadth have still fared well with a careful dis-aggregated strategy, focused on core competence.
  • Reporting, risk and accounting services – Regulatory pressure means that Insurers need to be able to access key reporting data instantaneously.
  • Financial Risk Modelling and Portfolio Optimisation. Innovative analytics software makes real time rebalancing of portfolios possible.

Human Capital Factors for Success 

Through speaking with and assessing successful business franchises and the professionals who drive them, we have identified the following leadership and business factors as critical for success.

Experience

  • Depth of rolodex with key Tier 1 and Tier 2 Insurance companies.
  • Focus on client solutions rather than single strategies.
  • Deep technical competence across asset classes complimented by a commercial understanding of the industry imperative.
  • Industry wide perspective on current challenges and future opportunities.
  • Partnership, listening, understanding clients’ needs and objectives – The importance of genuine partnership is often overlooked but those firms able to demonstrate sensitivity to the challenges of their clients as well as practical solutions have prospered. Ongoing education of the client base through thought leadership has also proven very effective.

Background

Talent for specific Insurance units has come from a range of areas including other asset managers, insurers themselves and also Investment Banks.‎

Investment Banks

Many banks have withdrawn or are withdrawing from this market as sell side revenues are increasingly strained. Insurance Solutions teams, Cross Asset Class specialists as well as Insurance Sales specialists within Capital Markets units are all worthy of consideration. Providing there is a sound cultural fit, sell side compensation has been depressed meaning that potential hires are more achievable than was previously the case.

Asset Managers

Standalone ‘Insurance Solutions’ units able to leverage firm wide capabilities are vital for long term success. Insurance experience, scale and focus – Insurance owned asset managers or those firms with a strong pedigree and existing track record in this market have continued to grow their presence.

Insurance Companies

Depending on the level of technical competency required, Heads of Asset Allocation, LDI Structurers and in some cases Chief Investment Officers can all be explored. Assessing the commercial competence and cultural fit of this community is a key selection criterion.

Conclusion

As regulation continues to impact and with interest rates remaining at historic lows, the opportunity for firms to partner with Insurers on a long term basis appears to grow. With a well-considered strategic plan and the right talent, ‘Insurance Solutions’ units will continue to play an increasingly important role for both Insurers and the Asset Managers they represent.