Report: Insurance Outsourcing Accelerates

(March 24, 2011) — Insurers are accelerating the rate in which they outsource their assets and the uptick is likely to continue, according to a report from the Insurance Asset Outsourcing Exchange.

“Difficult financial markets as well as the slow economy continue to challenge insurance companies’ earnings,” David Holmes, Partner in the Louisville, KY-based consulting firm Eager, Davis & Holmes, said in a statement. “They have become more open to the notion that the outside expertise and resources of an investment manager or consultant can make a difference.”

The report, titled Insurance Asset Outsourcing Analysis, finds a record 290 investment mandates were outsourced to third party investment managers in 2010, up from 256 in 2009 and almost double the 149 reported in 2008. However, fewer large multi-billion dollar mandates were outsourced in 2010.

While outsourcing has been primarily utilized by smaller insurance companies due to lack of resources, the financial crisis has pushed larger companies to increasingly rely on third parties. “It’s quite interesting,” Holmes told aiCIO earlier this year from his office in Kentucky. “The smaller insurance companies have always had a perception—an accurate one—that they don’t have internal resources or expertise to manage general accounts in an effective way. Large companies thought they could do it internally. After 2008, that’s changed.”

Specifically, the asset classes that experienced increased outsourcing last year, according to the report, include core and core plus fixed income and short duration/cash mandates. “Core fixed-income is the staple of insurance asset investing,” Holmes noted. “Increased outsourcing to specialized mandates reported to our database in 2009 was not fully sustained in 2010. It was at least partly opportunistic.”

Evidence of increased insurance outsourcing can be seen by the decision by Swiss Re to move $23 billion in corporate bond management to New York-based BlackRock in 2009. More recently, the giant European-based reinsurer issued a “longevity trend bond” to transfer $50 million in longevity risk to capital markets and would be triggered if “in the event there is a large divergence in the mortality improvements experienced between male lives aged 75-85 in England & Wales and male lives aged 55-65 in the US.”

In January,another survey of asset managers by the Insurance Asset Outsourcing Exchange noted the top mistakes insurance companies make, providing recommendations on how to avoid them. The most frequently cited suggestion for insurance companies: Provide a better description up front in the request for proposal (RFP), with survey respondents saying that insurance firms could better communicate a clear timeline for the RFP process.