Third party asset management for insurers
No. 5/2002
Swiss Re’s new sigma study predicts robust growth for the outsourcing by insurance companies of their asset management operations. The study estimates that the combined markets for third party asset management (TPAM) in the US and Europe will grow by an average of 10% per year over the next decade.
At the end of 2001, global insurance assets totalled approximately USD 11.5 trillion, of which 82% were held by life insurers. Managing these assets in the current climate of declining equity markets, low interest rates and record levels of corporate bond defaults is a significant challenge for the industry.
In response, insurance companies are increasingly turning to outside experts who offer specialist skills in insurance asset management to help them improve their returns and manage the risks associated with the investments they hold. Besides the turmoil in the financial markets, several factors are stimulating insurers’ demand for third party asset management, including:
-
Pressures on chief investment officers to deliver solid returns, maintain adequate diversification and manage operational risk
-
Increased scrutiny from rating agencies
-
The need for asset managers to follow a growing number of sectors
-
The demand for specialist expertise in matching insurers’ assets against their liabilities (so-called “asset-liability management”)
- Keeping abreast of changing accounting rules and regulations
Currently, American insurers employ third party managers to oversee USD 300 billion of investments. Insurers in Europe outsource about USD 140 billion of assets to the TPAM market, which is less established than in the US but, according to sigma, likely to grow more quickly.
The TPAM market is very competitive and highly fragmented
The market is very competitive and, in the US, highly fragmented with 10 providers each managing at least USD 10 billion of insurance assets and another 11 each managing at least USD 5 billion. Competition between banks, insurers, and independent asset management firms keeps TPAM fees relatively low. For fixed income mandates of USD 100 million or more, managers typically charge 15–20 basis points (1 bp = 0.01%); for active equity mandates of this size, fees are typically 30–35 bp.
In Europe, TPAM has a lower penetration than in the US. This is principally because European insurance asset managers must maintain a local presence – in some cases for legal reasons. This creates a cost barrier to entry, reducing competition between providers and strengthening the major European institutions who already have a foothold in the market.
Top five providers globally
The top five third party asset managers globally, at the end of 2001, were Deutsche Asset Management (including Zurich Scudder Investments) with USD 34.3 billion under management, BlackRock (USD 30.6 billion), Conning Asset Management (owned by Swiss Re) with USD 27.6 billion, AXA’s Alliance Capital (USD 19.9 billion) and Wellington (USD 19.6 billion).
More choices for insurance assets: hedge funds and private equity
In seeking to bolster investment returns and diversify their portfolios, insurers are not confined to the stock and bond markets. In recent years, large insurers have increased their asset allocations to alternative investments such as hedge funds and private equity. Hedge funds have the potential to earn solid returns, in some cases at low risk. Insurers’ world-wide holdings of hedge funds are, according to sigma, estimated to be USD 10–15 billion. Private equity, which involves investing in companies whose shares are not publicly traded, embraces the full range of enterprises from start-ups to mature companies subject to buy-out. Despite current setbacks, private equity has historically earned higher returns than the stock market, though at greater risk. sigma estimates that European and American insurers hold USD 25– 35 billion in private equity investments. In total, insurers’ alternative investment holdings are poised to grow by more than 10% annually in the coming years.
Challenging environment offers asset managers the chance to stand out
The current investment environment requires insurers to place new emphasis on their asset management operations. Investment risk management – an area at which some insurance third party managers excel – will become more of a priority for top management. In this environment, superior asset managers will have the opportunity, and the need, to distinguish themselves and prove their worth to clients.
This publication can be downloaded in English, German, Spanish, French and Italian.
Download "Third party asset management for insurers"
Download "Third-Party-Asset-Management für Versicherer"
Download "Gestión de activos de terceros para aseguradoras"
Download "La gestion d'actifs pour le compte des assureurs"
Download "Third Party Asset Management per assicuratori"
For further questions and copies of Chinese or Japanese versions, please contact sigma@swissre.com.
