Are Insurance Funds the Next Leap for Asset Management?

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Defined benefit pension funds are on the wane, with many of them bringing their investment capability in–house. Sovereign wealth funds are notoriously hard nuts to crack. Endowments and foundations have plenty of their own ideas. So where are the next asset mandates going to come from?

This question is bouncing around the financial hubs of Europe and the United States and, increasingly, there seems to be just one answer: “Insurance companies. We are all after insurance company mandates,” said a friend who works for a large asset manager in London. “If you can talk to the guys who control these assets, you will get fund managers lining up to talk to you.” It seems he is right. Over the past year or so, there has been a secular shift towards the industry that has been mostly self-contained, at least as far as its investment management is concerned. 

Just over a year ago, consulting firm Aon Hewitt, which already had strong ties to insurance, announced it was strengthening its insurance investment consulting practice and moving several of its pension professionals to work in it. Most other major consulting firms have followed suit.

Asset managers, which had previously focused on pensions, private banking, and wealth management, have been beefing up their insurance teams. Time was that only the largest fund houses, BlackRock and Deutsche Bank for example, touted their wares to insurance clients. Now all the major firms in Europe have insurance delegations, if not outright dedicated departments. American firms are following suit.

It is not surprising, considering the numbers. Last year, global insurance assets hit $24.6 trillion, just behind mutual funds with $24.7 trillion and pension assets with $29.9 trillion, according to data monitor TheCityUK. Of course, they have not sprung up overnight—the insurance sector has had trillions in its coffers for decades—so why have asset managers only just started to catch on? Put simply: regulation. 

There is a saying in the north of England: It is an ill wind that blows no one any good. In regular English, this means something must be really bad for no one to benefit—and Solvency II, the incoming strict set of rules for the insurance industry, may have dealt an ace to asset managers.

Robert Talbut, Chief Investment Officer at Royal London Asset Management and chairman of the Investment Committee of the Association of British Insurers (ABI), said, “Many people will observe that regulatory pressures on their capital position are getting greater and some insurers are going to have to look at asset management and decide whether it is core to their business or instead whether it could be done elsewhere.”

He continued, “Although it’s more talk than action at the moment, it is not going to go away. Taking a five-year view, there will be a number of insurers that exit partly or completely from the asset management business.” Royal London is an insurance company with an asset management company that manages its own, other insurers’, and other institutional client assets, totalling about £43 billion. 

“We have positioned ourselves, through our systems and expertise, to be able to take on other insurers’ assets. Along with capital positions to consider, regulatory pressure is forcing insurers to consider whether their in-house set up is good enough,” Talbut said. “Rules from financial regulators on complex financial instruments and derivatives will also pile the pressure—and costs—on insurance companies,” he added. In this regard, asset managers are already set up to cope, or at least are on the way to getting there. It is their business to be up-to-speed on the latest in sophisticated rule-abiding. Managing assets for one set of liabilities is just like doing it for another, right?

Wrong. 

Talbut said, “When asset managers look at insurance assets, they find these assests are much more complex than what they are used to. For example, reporting requirements are a lot more detailed; insurers need to report a lot more granular information to regulators and others, which other investors don’t have to do. The mandates are a lot more complex and demanding than they would get from a traditional client.” But that means they can charge more, right? 

Wrong again.

Insurers are generally competitive in their pricing and already have the systems in place to process these assets—just as Royal London does. And these businesses are scalable. Asset management companies breaking into this market would have to compete as well and as cheaply as those already there, and it seems this money is sticky. Traditional asset managers should also be careful that the trend stops there. If insurance companies can cope with technical investment mandates, a pension or SWF mandate should be no problem. Friends Life announced last November that it was creating an in-house asset manager, Friends Life Investments, which is set to launch in July. And it is likely it will not be the only one to do so. The industry needs only a few more of these and the poachers of insurance assets may soon turn into gamekeepers—forced to expend energy at just retaining what they already have. 

—Elizabeth Pfeuti