29 March 2017
Solvency II has turbo-boosted the move to insurance asset outsourcing. Asset managers are beefing up their capabilities to win market share—but what can you do to make yourself stand out from the crowd? Sarfraz Thind reports
Solvency II is possibly the biggest disruptor for insurance asset allocation in many years. Despite years of planning, the regulations caught many in the industry unprepared in realising the size of effort required to manage assets in a way that is favourable under Solvency II.
Since the directive went live, insurers have been finding that one of the main solutions lies with external managers.
“People were not fully prepared for what Solvency II would mean for their asset management,” says Karl Happe, chief investment officer, insurance related strategies, Allianz Global Investors (AGI). “It means the breadth of assets a small team can manage are limited. This has hit home in the last year or so and you are seeing this move to outsource.”
"There have been cases in the UK market where an insurer has not been satisfied with an asset manager and has kicked it out of a mandate," Felix Schachter, BNP Paribas Securities Services
Happe says there has been a “significant” increase in the enquiries for asset management solutions in the past 12 to 15 months. Others are reporting similar trends. JP Morgan Asset Management (JPMAM) saw insurer inflows increase to $135bn last year from $92bn in 2013. Schroders, meanwhile, has seen a 66% growth in insurer assets in the past three years. But it is a more cutthroat environment than it once was. Insurers are interested in money managers that can service their Solvency II needs and, in some cases, asset managers have been thrown out of mandates for unfulfilled Solvency II requirements.
“There have been cases in the UK market where an insurer has not been satisfied with an asset manager and has kicked it out of a mandate,” says Felix Schachter, UK insurance coverage, BNP Paribas Securities Services.
“There is an expectation of asset managers as not just a provider of services but a partner – on reporting and so on. We have also seen cases of asset managers in the last year where on the back of more sophisticated SCR [solvency capital requirement] projections, it has helped them to win business from insurers.”
All of this is leading to a land grab as asset managers jostle with each other to attract insurance assets in this ultra competitive environment. Large managers have been building up their resources in anticipation of the move to outsource. Those with insurance arms, in particular, are keen to voice their advantage over non-affiliated managers.
“In many cases both third-party insurers and our Axa IM parent company are investing in the same asset classes,” says Chris Price, head of insurance solutions, UK, at Axa IM. “Knowing that we have the expertise and track record from our experience of managing assets for our parent company provides additional comfort to our insurance clients. This, together with the Solvency II reporting infrastructure built for the insurance parent, is something many competitors struggle to match.”
Price says that managing €717bn ($778bn) in insurance assets, 58% of which is for the parent, has helped Axa IM gain experience dealing with the challenges of Solvency II, including the design of capital-efficient solutions and Solvency II reporting, and enabled it to attract other insurers.
But insurance-affiliates do not have everything their own way. The very largest non-affiliated asset managers have also been investing time and money to build up their Solvency II capabilities.
JPMAM set up a specialist insurance division—Global Insurance Solutions—in 2010 and currently has 60 people focusing on insurer investment needs covering the whole gamut from portfolio managers to analysts, quantitative analysts, accountants and other Solvency II specialists. With over 500 funds on its platform it would be inconceivable to go ahead and promote products to insurers were it not able to do the look-through, for example.
“We are seeing a divergence between those who are able to do Solvency II and those not,” says Gareth Haslip, global head of strategy & analytics, Global Insurance Solutions, JP Morgan Asset Management. “As an insurer you need to be able to satisfy Solvency II reporting needs for the regulator. If an insurer were to approach a random fund manager on the street it is probable that most wouldn't be able to do this.”
Schroders, meanwhile, which manages $88bn in global insurer assets, out of its total $490.7bn in AuM, has been beefing up its insurance regulatory and reporting infrastructure to deal with the new demands —but admits this requires significant resources which might not be available to all.
“You have to be a problem solver first because it is a complicated market,” says Andrew Terry, institutional director, US insurance, at Schroders. “It takes a lot of investment in reporting infrastructure and knowledge of the various local regimes to help insurance companies connect the right liabilities to the right investment strategies.”
Resources matter in this game—there has been a conversant focus of attention on the best equipped managers in recent times. Ian Coulman, chief investment officer at Pool Re, says that there is a bias towards larger asset managers, most of whom say they can handle the requirements for Solvency II reporting.
“Mostly insurers want to see a manager who can understand the nuances of Solvency II reporting,” he says. “There tends to be a bias towards larger managers who have got the right kind of infrastructure.”
"We are seeing a divergence between those who are able to do Solvency II and those not," Gareth Haslip, JPMAM
However, at the same time, he believes there remains a high requirement for smaller boutiques with specialist expertise as insurers continue to diversify towards different asset classes in the hunt for yield— while the reporting aspect is a factor it is not the critical factor. “You are looking first at what is the capital and return,” says Coulman.
The thought is not surprising. In reality, the current outsourcing pressures on insurers stem from a combination of the Solvency II capital charge structure and the low rate environment. The pressures to battle low rates have led to a mass migration to newer assets in recent years—and it is these new assets which require most Solvency II-intensive work.
“It is a combination of Solvency II and the low rate environment that is driving this,” says Axa’s Price. “If rates were not as low insurers would be investing in plain vanilla assets, which wouldn't have any Solvency II issues anyway.”
Solvency II troubleshoot
Along with reporting, Solvency II has also spurred a big move towards specialised Solvency II-friendly assets and tailored strategies developed by asset managers to promote their cutting edge over others.
Many asset managers have been promoting strategies which include derivative overlays or wrappers to reduce capital charges. And these seem to be selling. Axa IM has been shifting products with overlays on assets like equities and illiquids, such as infrastructure or private debt, and Solvency II-friendly multi-asset funds—it recently won a €2bn risk-managed multi-asset mandate.
“We’ve seen considerable interest in illiquid credit and potentially equities, of late,” says Price. “However, equities are relatively capital intensive under Solvency II and some of the illiquid credit assets are not eligible for matching adjustment, a key attribute for many life insurers. Nevertheless, these assets classes can often be structured to provide better Solvency II treatment and we have considerable expertise in this area.”
JPMAM, meanwhile, has been leveraging off its strong SCR-incorporated investment structure to develop adapt existing products to fit for Solvency II needs. The asset manager has set up Solvency II metrics within its front office—portfolio managers looking to buy assets can immediately see the impact on an insurer’s capital, says Haslip. It has helped it to tailor Solvency II-friendly strategies, including funds which minimise exposure to capital intensive assets as well as developing Solvency II-optimised global credit portfolios.
In step with the move towards new assets, a greater number of insurers are turning to asset managers for Solvency II-related consulting advice across their portfolios. For asset managers, this offers a foot in the door for greater self-promotion.
“As regards full outsourcing, we want to be a strategic partner to small and medium insurers who don't have the Solvency II staff that large insurers have,” says Haslip. “We partner with small and medium insurers and help them think about their strategic targets and how to fit it in with the capital budget, as well as doing the Solvency II reporting, Orsa [Own Risk and Solvency Assessment] and managing large parts of the portfolio.”
While this is unlikely to lead to full a portfolio mandate—most insurers have a second manager to benchmark to help with governance, says Haslip—it helps the asset manager to win a large share of the portfolio nonetheless.
Solvency II has also acted as the catalyst for another unusual move. Unlike in the past insurers are far more willing to outsource their traditional core assets from the fixed income book that they would once have kept strictly in-house. Happe says that AGI has seen its third-party insurance assets in core fixed income double in the past two years.
“There is increased interest in outsourcing core assets, which is something insurers haven't classically looked at,” says Happe. “It's a new development where you are seeing more insurance companies wanting to give traditional asset mandates to external managers.”
The impact of Solvency II on outsourcing is still playing out—insurers are notoriously slow movers when it comes to changing asset allocation policies. Nonetheless, there is a shake-up happening in the range of asset managers that will handle insurer needs and a potentially shrinking pool of outsourcing options. In the future, the fittest will survive.