Scalable Solutions Key in Shrinking Insurance and Pension Markets

Scalable Solutions Key in Shrinking Insurance and Pension Markets
Asset managers in Europe need to adapt to continuing marketspace consolidation

June 2018, London. Asset managers in Europe must develop flexible, scalable solutions in response to the increasing competition fueled by consolidation among pensions and insurers, according to the latest The Cerulli Edge―Global Edition.

It is also important, says Cerulli Associates, a global research and consulting firm, that managers strengthen existing relationships to avoid being sidelined in the event of merger activity.

“Managers face potential redemptions, heightened competition, and increased fee pressure as pension schemes and insurers consolidate into fewer, larger entities throughout Europe,” says, Justina Deveikyte, associate director of European institutional research at Cerulli.

Cerulli expects further consolidation among insurers as both the underwriting and investments sides of balance sheets remain under pressure. Pension numbers are continuing to fall, with regulators in several markets encouraging consolidation to tackle funding shortfalls.

“Some managers will, of course, benefit from bigger mandates if they can retain clients whose asset pools grow in the wake of consolidation,” says Deveikyte. “New entities with increased internal investment resources may also find they have more human resource with which to investigate new asset classes.”

Cerulli believes, for example, that alternative, alternative credit, and even illiquid private market managers stand to benefit from new allocations on the back of continued consolidation in both the pension arena and the traditionally conservative insurance space.

With scalability a key factor in a consolidating pension market, Cerulli believes that it makes sense for managers to offer vehicles that can be accessed by multiple clients, whether they are US$100 million or US$5 billion in size. Insurers are more anchored in the segregated approach due to their complex regulatory and solvency capital requirements. However, says Deveikyte, even insurers may increasingly consider the cost benefits of investing small syndicates’ assets into pooled funds rather than running each as a segregated account.

Cerulli believes that as insurers grow in scale, some may find it more cost-efficient to manage certain strategies themselves. To add value, external managers must increasingly offer specialist skillsets or strategies.

Deveikyte says that managers offering strategies with strong unique selling points, as well as solvency capital awareness and other dedicated insurance solutions, will find their services less expendable in the wake of a merger. “Another key way managers can maintain strong relationships with insurers is to ensure strategies are tailored with the insurer’s overall portfolio construction in mind,” she says.

 

Other Findings

  • In the U.S., a growing number of independent advisory enterprises are merging to create mega firms, which make attractive targets for asset managers because they stand out in a fragmented marketplace heavily weighted toward small, geographically dispersed, and individualistic shops. However, there are challenges to securing the business, says Cerulli. Distribution teams that understand the fabric of the largest firms are best placed to successfully interface with these firms.
  • Apart from in Korea, India, and Indonesia, consolidation is rare in Asia, says Cerulli, noting that product tie-ups are more common than mergers and acquisitions. These product partnerships, which are gaining traction, include joint product development, subadvisory arrangements, and exclusive distribution.

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