Credible asset management partners “declining”, say insurers

Handshake contractEuropean insurers are uncertain about the ability of asset managers to help them make enough investment returns to be able to meet guaranteed rates for their policy holders.

Research shows that insurers are concerned about fund management capacity and the ability of third-party investment firms to meet complex investment requirements.

The research into insurance asset management, conducted by Standard Life Investments, is the most comprehensive to date, the firms says. It covers insurers with €2.4 trillion of assets under management, which is 30% of pan-European insurance assets.

The low-return environment, and the way the EU Solvency II directive affects investment freedoms, are the causes.

Insurers feel they may fail to meet guaranteed rates for policyholders because, based on existing investment strategies, the expected future annual return is 2.4% – but firms need 2.7% to meet future policyholder requirements based on current guarantee levels.

Standard Life Investments, itself owned by insurer Standard Life, interviewed 56 senior insurance investment executives for the research.

The research also finds that regulatory modernisation and change may make it more challenging for traditional business models to strengthen income streams and make necessary strategic asset allocation changes.

In response to the problem of returns, many European insurers are considering significant strategic and tactical asset allocation changes to improve yield, and using outsourcing as part of the solution. Just over 40% are looking at outsourcing one or more asset classes.

Stephen Acheson, executive director, Standard Life Investments, says: “European insurers’ business strategies and traditional business models are being fundamentally challenged due to the combination of the long-term low return environment, Solvency II and the ongoing need to deliver on promised guarantees.

“The survey highlighted a clear theme of insurers looking to outsource to the external asset management industry. However, it also highlights a belief among insurers that the number of credible outsourcing partners is declining.”

The survey also finds that risk appetite appears to be rising and that half of insurers expect to reduce sovereign fixed income exposure, while over 60% expect to increase allocations to real estate and/or alternatives.

However, there is a ‘north/south’ divide on asset allocation, with Southern European countries having more confidence in existing investment strategies due in part to higher domestic yields on their sovereign fixed income.

©2015 funds europe