Are Asset Managers Ready For The Changing Tides?

Steve Doire, Head of Strategic Client and Platform Advisory at Clearwater Analytics, explains why a move towards investment management outsourcing in the insurance industry presents a unique opportunity for well-equipped investment managers 

Driven by years of low rates and a need for diversification, insurers continue the megatrend of outsourcing investment management. Driving this is the combination of investment skills, economies of scale, and added value services. Clearwater’s recent research of over 1,000 insurance investment professionals shows that over 50% of insurance firms currently outsource more than half of their portfolio to external money managers while 44% plan to outsource funds to asset managers specialising in alternative assets in the future.

Clearwater, in partnership with The Insurance Investment Outsourcing Exchange, recently released the 9^th annual Insurance Investment Outsourcing Report. 58 managers participated and reported $3.3 trillion in insurance AUM – up from $1.9 trillion just 5 years ago. While core fixed income represents the bulk of the AUM, insurers increasingly tap managers for specialty fixed income, as well as private and alternative asset classes. If one were to go back a couple of decades, the typical insurer invested their portfolio in publicly traded governmental and corporate bonds with a smattering of public equity. In fact, I used to quip that “public equities were the first ‘alternative’ for insurers”. Times have certainly changed.

All this begs the question, as insurers continue to seek out specialised investment mandate solutions: how many investment managers possess the multi-asset tech capabilities to manage this rise in interest in alternative investments and take advantage of the outsourcing wave? Managers who are to succeed in the space need to build a complementary service platform that delivers on the many related needs of insurers. It takes a combination of investment expertise, along with an understanding of the many insurer investment specific needs.

Topping the list is knowing what the insurance accounting standards are and how to apply them to the investment strategy, what the regulatory allowances are, and delivering the transparency demanded by stakeholders including management and rating agencies. Insurance asset managers must invest in industry-specific technology that allows them to deliver multi-basis accounting and regulatory compliance across an increasingly wide and diverse set of strategies.

This in turn needs to be complemented by full portfolio transparency – all based on accurate daily data. To this point, I have heard managers make statements such as “50% of the sales process with an insurer is around the added value knowledge and services that complement the actual investment strategy”. 

I expect annual growth rates of outsourced assets to continue to exceed 15% for those managers who commit to the space and deliver on these specialised needs. This wave of increased outsourcing is there to be ridden by managers who approach the space with the right set of resources and technology partners.