Insurers: Asset Management’s Saviors? | Chief Investment Officer

As the world’s largest pension funds bring more investment capabilities in house, asset managers are turning towards insurers as their new saviors, two industry surveys indicate.

While pensions have been reducing their reliance on third-party asset managers, ultra-low interest rates and bond yields mean insurance companies have been diversifying into new asset classes of which they have little knowledge internally.

Nearly two-thirds (63%) of insurers surveyed by Clear Path Analysis were seeking to outsource some asset management. Fixed income, infrastructure, and private equity were the asset classes most likely to be outsourced, the survey showed. Within fixed income, corporate loans, infrastructure debt, and residential mortgages are all of interest to various groups of insurers.

The survey also found that 13% of continental European insurers were seeking outsourced expertise across all assets, while just 5% of UK-based insurers felt the same.

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This year alone, asset managers including AXA, Aberdeen, Columbia Threadneedle, JP Morgan, and Lombard Odier have hired in insurance experts to target the European insurance market. More than half (57%) of managers now have dedicated insurance teams, according to a separate survey by consultancy firm Prometeia.

Asset managers expect to grow their share of the insurance market by roughly €1 trillion ($1.1 trillion) in the coming years, bringing their total assets in the sector to €4.5 trillion, Prometeia reported.

“According to expectations, medium and small managers would experience higher growth rates (13% to 14% a year), with an increasing role [for] non-captive managers—growing twice as fast as insurance players,” the consultant wrote. “Significant opportunities are seen also by alternative managers, which can ride the tailwind generated by the low yield environment.”

As well as investment expertise, insurers are also seeking risk management and strategic asset allocation advice, Prometeia said. Complying with Solvency II rules—which include limits on the amount insurers can invest in risky assets and a requirement to hold cash buffers—is also an area of concern, the consultant added.

Last month, the International Monetary Fund (IMF) warned that low interest rates threaten the solvency of insurers and pension funds. Insurance companies in Germany and Japan, which often offer guaranteed returns, are at risk of “an eroded asset-liability management gap as policies continue to pay out a return higher than current rates,” the IMF said. It highlighted a need for “high and robust standards” on insurance capital—but warned that chances for consensus on an international standard have been threatened by Brexit and the disinclination of the US Federal Reserve to adopt such a standard.

Mark Schmid, CIO of the University of Chicago endowment, will be honored with Chief Investment Officer’s Lifetime Achievement Award at the seventh annual Industry Innovation Awards on December 12 in New York City.

Past winners include Notre Dame’s Scott Malpass, the Teacher Retirement System of Texas’ Britt Harris, Strategic Investment Group’s Hilda Ochoa-Brillembourg, and NISA Investment Advisors’ Jess Yawitz and Bill Marshall. Last year, the title was awarded to Rick Dahl, the newly retired CIO of the Missouri State Employees’ Retirement System.

Although Schmid has only been at the University of Chicago since 2009, his asset-owning career spans three funds over three decades. As CIO at Chrysler and, afterward, Boeing, he led efforts to reduce risk through liability-driven investing.

This experience leading large corporate pensions continues to inform his current role as investment chief of U. Chicago’s $7.6 billion endowment. “We’re managing the endowment with the long-term needs of the university at the forefront, as opposed to trying to hit a certain return,” Schmid explained in a 2012 interview.

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Rather than fully embracing the Yale model as many endowment peers have, Schmid and his team at the university have developed an investment strategy that focuses primarily on risk. The “total enterprise” approach takes into account the university’s total leverage, charitable gifts, and capital plans—as well as factors such as liquidity, convexity, and leverage.

Along with garnering respect within the nonprofit space for his unique approach to endowment investing, Schmid has earned a reputation developing investment talent. Upon his departures from both Chrylser and Boeing, the pensions were able to promote from within rather than seek talent elsewhere—and several other of Schmid’s former deputies have gone on to CIO roles of their own.

“Part of my job here is that the management doesn’t have to go outside when I move on,” Schmid told CIO this fall. “I’ve already accomplished that. There are definitely people here who can do this job.”