(June 5, 2013) – Insurers talk a good game about diversifying their assets, but the reality is just 3% of their portfolio is in alternatives and nearly half of them aren’t using hedging techniques.
A survey of 30 European insurance CIOs, carried out by the Boston Consulting Group and AXA Investment Managers (AXA IM), also found that while emerging market debt, real estate, and infrastructure were all attractive, external asset managers were desperately needed for the required competencies in these satellite asset classes.
The results arrive at something of a perestroika moment for insurance companies. With interest returns close to or below the level of minimum statutory guarantees in many European countries, insurers are facing a huge reinvestment challenge.
Add to this the record low interest rates insurers have been suffering lately, and the problem becomes worse. The survey found 68% of insurers identified low interest rates as their key challenge, and most interviewees saw this environment lasting for at least the next two years.
Laurent Seyer, global head of multi-asset client solutions at AXA IM, said the financial crisis and new regulations had pushed insurers into clinging on to their fixed income investments.
“Diversification can help an insurance company improve its risk/return profile. Moving into satellite assets can also help insurers find assets with less volatile cash-flow patterns than with publicly traded assets. This is important, as under IFRS regulation, it translates into lower balance-sheet volatility,” he added.
Some insurers surveyed also did not have a centralised asset and liability management (ALM) function in place – this was particularly prevalent among the smaller players. By comparison, some 75% of large insurers have moved, or are the process of moving, their ALM functions from a business level to a centralised group one.
The study demonstrates that current best practice insurers have invested heavily in centralising and optimising their ALM process and are evaluating their investments and hedging needs in order to actively manage interest-rate and mismatch risks.
Davide Corradi, managing director at the Boston Consulting Group, said: “Centralised ALM, or even an understanding of the ALM position, is still far from standard practice throughout the industry.
“We have seen clients face numerous implementation difficulties in terms of pushback from internal stakeholders, the need to change performance attribution and measurement for executives, significant HR redeployment, and the courage to realign their investment portfolio to their target ALM position. To achieve a centralised ALM position requires senior management buy-in right from the top and a dedicated project team with a mandate to make real change.”
The report also found there was little appetite to outsource the management of assets of European insurers. At present, fewer than 5% of European insurance assets are outsourced to non-affiliated third-party asset managers, compared with 20% of American insurance assets.
A copy of the study is available here.
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