Competition From Insurer-Owned Asset Managers Is Increasing

Competition From Insurer-Owned Asset Managers Is Increasing

Traditional managers must focus on niche products and clients’ specific needs

November 2018, London. Asset managers in Europe face increasing competition from insurer-owned asset management businesses, according to the latest The Cerulli Edge―Global Edition. With underwriting margins under pressure, the management of external assets—including pension business—offers a source of low-risk profits for insurers, says Cerulli Associates, a global research and consulting firm.

As liability-driven investors with long track records in low-risk, income-generating strategies, insurers are a natural fit for many pension schemes—and these cash-rich companies have the capacity to seed new products, deliver them to market, and distribute them via their own platforms.

“The top insurer-owned managers are now on an even footing with the big asset management houses when it comes to winning pension money. One executive told us that firms are losing ‘huge volumes’ of business—and investment talent—to insurers,” says Justina Deveikyte, associate director, European institutional research at Cerulli Associates.

Insurers’ long track records in the corporate bond space and growing experience in private and alternative debt mean they are among the most innovative players in the fixed-income space. Although their products are often initially pitched at fellow insurers, they also appeal to defined benefit schemes seeking steady cashflow-generating strategies to help fund them into maturity.

Insurers’ products have often been developed in-house to generate returns for the parent company. This means the products usually come to market with demonstrable track records. Traditional asset managers, on the other hand, must rely more on strong reputations, persuasive marketing, and distribution networks to build scale.

Although larger traditional asset managers are also able to seed new products off their own balance sheets, tightened capital-management regulations mean that bank-owned managers have less capacity in this regard than in the past. Most smaller managers simply do not have the resources to develop new ideas and execute their delivery on the same level. Many are increasingly having to rely on outperformance, niche expertise, marketing, and the ability to identify and attract first-move investors.

Cerulli believes that managers should focus on employing targeted marketing and developing products that meet clients’ specific needs, while striking a balance in terms of scalability and cost efficiency. They should consider partnering with insurers and other liability-driven investors to strengthen their offerings at the back end of scheme life cycles to reduce the risk of clients building new relationships elsewhere. Managers should also take advantage of the fact that most insurers are willing to include competitors’ funds on their platforms. They can design building-block products to sell at scale via platforms, master trusts, and fiduciaries, in addition to developing low-cost bundled offerings.

“Managers must engage with clients and consultants to ensure that their product development meets specific asset-liability framework requirements rather than innovating for innovation’s sake,” says Deveikyte. Moreover, they need to decide whether to take insurers on at their own game, develop standardized products that can be distributed via insurers’ networks, or branch into new areas of specialism to show that there are still things asset managers can do that insurers cannot.”

Other Findings:

  • More financial services firms in the US should be including the independent retirement account segment in their wealth management distribution strategies, given the shifting population demographics, says Cerulli.
  • Japan’s pension market is opening to foreign managers, says Cerulli. Subadvisory partnerships and niche offerings are among the opportunities.

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