5 April 2017
In March I attended the RiskMinds Annual European Insurance conference in Amsterdam, which attracted a wide variety of executives from the European insurance industry. Delegates were drawn from more than 20 countries and included over 30 Chief Risk Officers, alongside Chief Investment Officers from some of Europe's largest insurance firms, senior stakeholders from Regulators and from Insurance Investment management.
AMC Executive Search contributed to Day 1 of the conference, which was dedicated to Capital and Liquidity Management. I acted as a panellist for the In-house Vs External Asset Management discussion, led by Erik Vynckier, Partner in InsurTech Venture Partners. Chief Investment Officer representation on the panel was provided by Ageas' Wim Vermeir, and from a leading insurance third party manager, Eugene Dimitriou, Head of Insurance Solutions at Columbia Threadneedle.
The discussion gave rise to a large number of organisational, talent and human capital considerations, as insurers across the world wrestle with the range of investment models open to them in the current low interest, regulation heavy environment. For those taking an in-house approach, there are lateral hiring talent issues which go far beyond the mere cost and return implications, such as the cultural assimilation of hires from the banking, asset management or consulting industries, compensation, development and work behaviours and a range of considerations which might assist the successful sourcing, selecting and embedding of talent. AMC has been fortunate to work with firms from each of the insurance asset management models, including In-house managers, Captives (insurer-owned asset manager), and a variety of Outsourcing and Mixed Outsourcing models, which range from tactical or strategic trade outsourcing, single asset models and even CIO outsourcing.
What did the conference consider as the distinguishing factor(s) which characterise good insurance investment management? Would this be an ability to advise insurance company clients on their balance sheets, including ALM/capital and prudential advisory services or similar IFRS/EV measurement? These are sometimes considered to be nice-to-have capabilities, but is that occasionally at the expense of old-fashioned, benchmark based investment success?
This turned into quite a lengthy discussion point, although the view of the audience was clear: they did indeed feel willing to forfeit a degree of tactical and short term investment success for the more comprehensive advisory information suite which is offered by leading insurance asset managers, due to the additional control, risk and decision support abilities offered by a more comprehensive package. Even for delegates emanating from larger, captive manager firms who already possess a range of such functionality at their disposal, there is a sense that having more than source of ALM and capital information is rarely a bad thing...
Third party managers have long been accustomed to acquiring talent from the insurance and consulting industries that can develop, refine and perhaps even industrialise this information and so the discussion moved to an area in which insurers could either import or outsource talent with a direct and tangible impact on investment returns.
Most agreed that this factor was in fact Executions expertise. Insurance companies are not designed to make swift investing decisions. This is a good thing in strategic investments discussions, but it can become burdensome in more tactical scenarios, particularly where internal investing authority is delegated to committees which may not sit on a weekly basis. In such a scenario, by the time a trade has been confirmed it may well have become heavily discounted or lost its value entirely.
Increasingly, the necessity to negotiate complex and time-consuming approval processes is being challenged in the hiring market. For CIO functions which delegate executions based tasks to their in-house or external managers, portfolio construction skills are beginning to command a premium. This trend has been on the rise for a while, but it has been given added impetus by the impact of EMIR on derivative portfolios, especially in the life sector. A bank trading background brings with it a range of liquidity and flow based skills. The cultural implications of such hires when they enter direct into an insurance office poses further questions, but as the fixed income market becomes increasingly illiquid, these skillsets will grow in importance, it seems.
There is a perception that the insurance asset management industry itself is fragmenting as insurers look further towards esoteric assets. This could be a sign that the larger balance sheet firms have become more comfortable with their post S2 ALM agenda and therefore have no need of the more wholesale add-on services which an established insurance asset manager provides. Or more likely it says something about the shortage of certain types of asset, and their centrality to SAA(s) in the prevailing environment.
There is a view that insurers are more readily embracing boutique or smaller third party managers and some time was spent on our panel discussing how the larger insurance managers are countering this with further specialised offerings in areas such as Illiquid or Private Credit. Categories such as direct lending and commercial real estate are growing in bandwidth, with investments in areas like ground rent securitisation or asset finance funds.
ESG and Risk Premia/Factor based investing are having a similar effect in other classes. All of these are to some extent characterised by bank retrenchment and all have been areas where investment expertise has recently been hired into the insurance industry.
From a hiring perspective, the contemporary emphasis on PE and private debt has led in-house managers in particular to equip themselves with asset sourcing, origination based expertise. Such hiring lends itself to those which hold or manage longer duration, capital intensive business models on the life side of the industry. On the manager side, there has recently been a small influx of insurance company portfolio managers, or those holding actuarial qualifications or insurance coverage skills, which are steadily developing asset sourcing skills in funds like Macquarie's successful MIDIS offering.
Given widely reported concerns over the additional complexity and potential opacity of capital reporting in the post-S2/post local GAAP environment, there was also some discussion from the audience about capital reporting by managers for their insurance clients. There was quite a consensus that managers could, as a whole, be doing more in this area. Nobody seemed to be urging for detailed, granular Pillar 3 templates, but some members of the audience clearly did feel that investment performance vs capital information is less routinely provided than might be ideal.
A final, and in many ways overriding theme of the discussion concerned communication. Panellist Eugene Dimitriou spoke for many delegates when he pointed out that it can take years for a manager to develop a really in-depth understanding of the intricacies of the balance sheet of a large life office. Whatever model, along that journey, a consistent and sustained flow of information between manager and insurer represents a key to investment success.