How the insurance asset management industry is responding to consolidation and competition
Naïm Abou-Jaoudé, CEO of Candriam and Chairman of New York Life Investments International explores the macro environment and how the insurance asset management industry is responding
Insurance Investor Editorposted on Thursday, September 19, 2019
How will growing competition in the insurance asset management sector affect third-party managers’ ability to differentiate themselves?
Naïm Abou-Jaoudé: Asset managers should share a long-term perspective and a disciplined risk management approach and invest in the development of strategies and solutions that meet the current and future needs of insurers.
Another key element is to have dedicated specialist resources for insurance-specific investment solutions. This includes expert portfolio managers, in-house actuaries and financial engineers.
These experts develop and manage portfolios not only according to financial considerations, but also integrating insurers’ evolving regulatory and accounting objectives and constraints.
The winners of tomorrow also go beyond the mere management of insurers’ assets and are able to offer value-added services ranging from ALM analyses and the design of risk-reduction strategies to comprehensive regulatory reporting and analysis on issues that are of importance to insurers.
In an ever-evolving investment context, multi-asset managers have the advantage of being able to design custom insurance-specific portfolios across asset classes. Expertise in sustainable investing is also key, as this is a matter of increasing importance to insurers.
Will we see a growth in alternative asset class providers, and if so which ones?
Naïm Abou-Jaoudé: Demand from institutional investors, including insurers, for alternative asset classes has grown significantly. This growing demand is particularly noticeable in the private and illiquid space, driven by low interest rates.
For example, investors are looking at the integration of private debt, private equity and real estate investments in their portfolios.
We believe that this trend will benefit those asset managers which combine in-depth expertise in these asset classes and excellent access to the relevant markets on the one hand, with, on the other hand, the ability to understand how such investments work in an insurer’s portfolio, from a risk/return perspective and in an ALM context, but also in regulatory and accounting terms.
Will the pressure on costs trigger more overall consolidation equalling a thinning of the provider universe? What could this mean for product choice?
Naïm Abou-Jaoudé: Insurers and asset managers have in common that their respective industries are subject to pressures on costs and margins and have seen some consolidation, including via mergers and acquisitions.
Against this backdrop, insurers are paying increasing attention to the added value they are receiving from their asset managers, both in terms of investment performance and in terms of the ancillary services, and rightfully so.
Asset managers that are able to deliver consistent, demonstrable value within pertinent insurance-specific solutions and services, are likely to be the preferred long-term partners of insurers.
We are proactively thinking about cost-efficiency when developing investment solutions. For example, when designing a solution to reduce the drawdown risk in one of our flagship European equity strategies, we developed a derivative overlay focused on cost efficiency.
In an environment in which insurers are seeking diversification, notably along the credit continuum and in the alternatives space, we do not see pressure on costs as necessarily reducing product choice. Rather, we believe that there will be greater selectivity with regards to asset managers with demonstrable added value.
The recent growth in interest in private markets is yet to fully materialise, but the potential looks promising.
Where will the early adopters focus their attention and could the long-awaited arrival of long-term, stable money from insurers act as an economic stimulant in the face of political uncertainty?
Naïm Abou-Jaoudé: Many insurers are turning to alternative investment opportunities in private markets in search for performance potential and diversification against the backdrop of low interest rates.
They look for opportunities to capture capital appreciation and higher income, even if that means sacrificing some liquidity.
Certain private assets fit well with the long-term investment horizon of some insurers.
In addition to these assets often serving as inflation hedges, the less liquid nature of some unlisted instruments also makes them less sensitive to market fluctuations.
This gives them less volatility than some of their counterparts in the public space.
Many insurers are indeed seeking out opportunities in the private space because of their generally low correlations to public assets. Adding them to a portfolio can yield significant diversification benefits and help optimise the efficiency frontier of a portfolio.
Insurers have always been important actors in providing long-term financing, via their investments in public and private equities and bonds.
At the same time, it must be kept in mind that a key objective for insurers when managing their assets is to generate the necessary returns within their risk budgets to meet their obligations and to match assets and liabilities. They have to do this within significant regulatory constraints and under accounting considerations.
And as investors, insurers themselves also face the challenge of an uncertain geopolitical environment. Therefore, the burden of mitigating political uncertainty should probably not be added to insurers’ already very full plates.