Insurers’ asset management demands are shifting, according to Mathilde Sauvé, head of institutional solutions at Axa Investment Management (IM).
As interest rates have stayed low, asset allocation strategies have broadened to include less traditional investments for property and casualty insurers.
“We have seen increased exposure to alternative credit, private equity, loans and infrastructure debt for example, which has allowed carriers to generate this increased yield, owing to the illiquidity premium or premium generated from the complexity of the assets,” said Sauvé.
While the shift led to many insurers seeking multiple asset management partners to manage a broadened investment book, efficiency savings are now reversing that trend, she suggested, as margins have tightened as well as Solvency II adding to European regulatory reporting burdens.
“We are now seeing a full reversal where insurers are again trying to rationalise the number of fund managers they use,” said Sauvé.
“Generating efficiencies around reporting, monitoring and governance across multiple asset classes frees up insurer members to get on with other tasks necessary to running a carrier. They want partners who are able to complement them throughout the whole value chain, from providing asset management expertise to efficient reporting and regulatory services,” she said.
Her appraisal of insurers’ priorities was angled towards smaller insurers, lacking the budget to spend on multiple boutique investment managers.
“We are finding that multi-asset is a particularly attractive option for smaller and medium-sized insurers, whose investment pots may be too small to justify a segregated mandate,” she said.
“Going into more esoteric asset classes can be a resource-intensive exercise. For smaller carriers, the costs associated with hiring investment expertise for all their asset class requirements, often results in much of the benefit generated being lost. If one partner can offer access to all desired asset classes these costs can be significantly reduced,” said Sauvé.
The core fixed income part of the book – its duration matching risks on the underwriting side, with similarly strict but conservative targets for yield and diversification – is being separated off from more “discretionary” mandates, she suggested.
“Carriers are also becoming more open to offering their fund managers discretionary mandates, allowing their investment partners more flexibility on when to enter, increase exposure to and exit certain asset classes in a return seeking part of the portfolio,” Sauvé said.
“We have also noticed that in the request for proposals from small and medium size insurers, many are now asking for proposals to be presented on a total return basis, rather than aiming for a benchmark,” she said.
“Then there’s another type of discussion happening which looks at developing a satellite portfolio, which is there to grow the assets – here we’re talking about pure yield, total return, along with a volatility budget and the insurer’s SCR budget,” said Sauvé.
“The impression we get is that being an investment expert is no longer enough. As a true partner you have understand your client’s business needs to enable them to make better decisions – the investment, risk, economic, regulatory and accounting decisions,” she added.