30 September 2019

The days of an easy life for European non-life investment teams are over

As many non-life insurers come to rely on their investment performance for an ever greater slice of their total profits, or to make up for underwriting losses, investment teams are looking at new asset classes with the help of external managers. Far greater transparency about the insurers' business practices is offering a unique glimpse into what they want and to whom they outsource this key task. David Walker reports

The stereotype of the investment capability and resources of the 'typical' European non-life insurer, runs something like this.

The premiums roll in. The CIO invests them in cash, sovereign debt and other highly-rated fixed income, to be readily accessible at all times for when the next hurricane/car crash happens.

The CIO and a couple of colleagues with a good grasp of bonds are not overly challenged when investing their part of Europe's €400.6bn ($441bn) general account (GA)).

And the CEO overseeing them is far more interested in the 'real work' of underwriting.

These days, those stereotypes fall far short of the reality.

Investing has gained much greater importance in 2018 after more than one in every three (36%) non-life premiums written resulted in a loss. In 2018 it was worse, according to pan-industry analysis by Insurance Risk Data, the data arm of Insurance Asset Risk.

Many natcat insurers needed investments just to turn a profit. In 2017/2018 GA investments were the profit-makers, not the cash register, of many non-life firms.

As CIO's acknowledge they still have one or even two years' grace after an underwriting incident happens, many examine making semi-liquid investments. They are engaging independent managers to help.

Sometimes these managers are generalists who are asked not to stray far beyond the familiar field of fixed income.

But, increasingly, the managers enlisted are specialists.

Canopius says it can pressure specialists harder, squeezing more performance from markets niches. Canopius enlisted 11 different managers in 2018.

Analysis of the 2018 solvency and financial condition reports (SFCRs) of 600 underwriters doing non-life work revealed 743 delegations – or 1.25 managers per underwriter, on average.

Multiple engagements

Having more than one significant relationship with an asset manager is not common for a non-life insurer. But nor is it unheard of.

Ace European Holdings had eight independent managers.

And Denmark's Lønmodtagernes Dyrtidsfond – surely the non-life world's most prolific outsourcer by number of mandates – hired 22 managers. Among them were MFS, BlackRock, Impax, BNP Paribas and alternatives managers Cheyne, KKR and Apollo.

Lack of inhouse expertise

The main reason insurers gave for farming out was a lack of inhouse expertise.

One result of this is that external managers may be enlisted for a range of investment-related activities, not just asset allocation.

Oberoesterreichische Versicherung uses affiliate Meag for portfolio management, reporting and analysis, risk management, tactical allocation, 'quant methodology and models'. CFDP in France uses an unnamed manager to invest a diversified bond mandate, then give it 'associated reporting - performance, financial, risk, accounting and regulatory'.

CG Car Garantie Versicherung in Germany needs its group manager Gothaer Asset Management (GAM) including for 'macro research'.

Non-life firms may take such requests one step further, especially if their own staff are few in number. In 2018 CG Car Garantie used GAM to focus mainly on geopolitics in France, Italy and Spain, trimming exposure in France and Italy.

Managers working for life insurers will probably be prepared for research requests, and their own views on the prevailing investment climate.

Unexciting mandates

Sometimes mandates for non-life insurers seem fairly 'boring'.

Apollo Syndicate Management said in 2018 it changed the investment approach of Lloyd's syndicate 1969, from being 'historically in money market funds' to gradually buying into short-dated sovereigns and credit during 2H 2018. By the end of the year about half of the syndicate's $254m investment pot had moved.

Syndicate 2012 of Arch Underwriting at Lloyd's, meanwhile, said it was important that investments beat benchmarks, but it quickly added that the syndicate's "primary investment objective is to preserve capital and ensure adequate liquidity for settling policyholder claims'. Cash, surely, is king.

Goldman Sachs, manager for syndicate 2008 since 2017, may enjoy limited free rein to invest into esoteric areas, given that the managing agent StarrStone Underwriting emphasises its only recourse to liquidity-cash, apart from using its GA, is to make cash-calls.

Beyond bonds

But many non-life underwriters are going far further than cash/bonds.

Pure general insurer Onderlinge Verzekering Maatschappij ZLM in the Netherlands has Kempen Capital Management for a fiduciary mandate. It is one of a number of such engagements that the independent Dutch manager runs for local underwriters.

Cases of fully-fledged investments into alternatives will, for now, remain the exceptions that prove the rule.


Managers are being engaged by non-life firms to optimise general accounts. It is optimising for risk / reward, but also for Solvency II capital charge. Insurance Risk Data expects to see much more of this in future.

A much-expanded analysis of the points made above forms part of a 200-page report on outsourcing by insurers across the EEA, Switzerland, Bermuda published by Insurance Risk Data. For more information on the report please email scott.davis@fieldgibsonmedia.com