European Insurers Are Seeking Increasing Assistance with Their Investment Portfolios

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European Insurers Are Seeking Increasing Assistance with Their Investment Portfolios

Outsourcing is growing, creating opportunities for external asset managers; however, fee pressure will be a key challenge

May 2020, London—Cerulli Associates’ latest report, European Insurance Industry 2020: Meeting Insurers’ Evolving Needs, shows that European insurers continue to rely on external asset managers’ expertise when it comes to foreign fixed-income strategies, as well as certain income-generating alternative strategies. However, most remain comfortable managing core investment-grade fixed income in-house.

Cerulli expects insurers’ outsourcing of investment management to non-affiliated asset managers to continue to grow, albeit at a slower pace than in recent years. The report findings suggest that European insurance assets outsourced to third-party, non-affiliated managers stood at around €1.2 trillion (US$1.3 trillion) at the end of 2018—slightly more than 16% of the region’s total general account assets. The findings also suggest that outsourced assets are set to grow to more than €1.5 trillion, or around 19% of total assets, over the next five years.

The region’s smaller insurers tend to manage most of their traditional fixed-income assets in-house, but the continued low-interest-rate environment could prompt some to start outsourcing more of their core fixed-income assets. The outsourced chief investment officer model could gain traction among these smaller insurers over the next three to five years. “Insurers that do plan to take this approach will choose managers with strong credit research teams and asset-liability management (ALM) or cash-flow matching capabilities,” says Justina Deveikyte, associate director in Cerulli’s European institutional research team and lead author of the report. “However, we do not expect this to happen on a large scale anytime soon.”

Cerulli’s survey of European insurers found that 42% of respondents plan to increase their outsourcing of core fixed-income strategies over the next three to five years, whereas 33% do not plan to do so. Dutch (63%), French (53%), and UK (43%) insurers are most likely to increase their outsourcing of core fixed income over the next three to five years; German insurers are the least likely to do so.

“Increasing consolidation and greater focus on cost reduction will prompt some European insurers to increase their outsourcing of their core fixed-income portfolios,” adds Deveikyte. “Smaller insurers typically lack the expertise to run diversified fixed-income portfolios in-house, but it will not be easy to convince their CIOs to outsource more, because they generally like to maintain tight control of their ALM. Asset managers should seek to showcase their success stories to persuade smaller insurers to outsource assets to them.”

The European insurance asset management industry is highly competitive. Nearly 50% of the asset managers Cerulli surveyed said that decreasing fees and margins is the most significant challenge they currently face. It is the second year in a row that respondents have ranked decreasing fees as their major challenge.

The survey found that the majority of respondents currently face the highest fee pressure in the Dutch, Swiss, and UK insurance markets. In addition, the French insurance market is dominated by a small number of large local managers that are driving prices down. This makes it particularly difficult for foreign managers without sizable insurance assets to compete with local managers. However, fee pressure is less severe in the Italian and German insurance markets. Cerulli anticipates more downward fee pressure for global mandates; European fixed-income mandates already have low fees and therefore limited room for additional discounts. Managers that offer enhanced buy-and-hold strategies, provide additional screening and analysis to minimize the probability and impact of defaults, or that integrate ESG considerations into their fixed-income analysis typically face less fee pressure.

 

NOTES TO EDITORS:

This and several other new findings make up The Cerulli Report—European Insurance Industry 2020: Meeting Insurers’ Evolving Needs, the seventh iteration of this annual report. It provides detailed analysis of how European insurers use third-party asset managers to navigate the investment and regulatory environment. It includes 109 charts and tables that give insight into 23 European insurance markets, with particular focus on six key insurance markets: the UK, France, Germany, Italy, the Netherlands, and Belgium.

Interviews and surveys:

The report’s analysis centers on proprietary research, including more than 40 qualitative interviews with a range of practitioners in the six key markets examined. Interviewees included insurers, captive asset managers, and independent asset managers (traditional and alternative).

A total of 17 asset managers completed the European insurance asset management survey, conducted during March and April 2020. These managers ran more than €2.5 trillion of European insurance assets under management as of December 2019.

A total of 120 European insurance companies, representing more than €6 trillion of European insurance investment assets, completed the insurer survey, conducted during March and April 2020. One-quarter (25.0%) of the respondents were UK insurers, 25.0% were French, 25.0% were German, 12.5% were Italian, 6.5% were Dutch, and 6.0% were Belgian.

 

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