Some of Asia’s leading insurers remain unconvinced about the merits of outsourcing their portfolios to external managers even as other asset owners push to do so.
Speaking at AsianInvestor's inaugural Insurance Investment Forum in Singapore on Thursday, Liu Chun-yen, chief investment officer for AIA Singapore, said that “the most challenging part is to ask them to generate alpha".
Alpha is the excess return that can be eked out by a manager relative to the broader market or benchmark – or beta – return.
Another important consideration is the asset-liability management (ALM) needs particular to insurance companies.
“We have spent a lot of time [making] external managers understand what we need in terms of managing our balance sheet and outperform[ing] investments. The understanding of the balance sheet is not as easy because [the] liability side is a bit more complicated,” added Liu, whose firm she said has $34 billion in assets under management.
Her views were echoed by Don Guo, the chief investment officer of Asia Capital Reinsurance Group, who said that it is "most difficult” for external managers to consistently generate alpha while taking on a commensurate level of risks.
In addition, handing out mandates to external managers could give rise to "systemic" risks, noted A.K. Sridhar, chief investment officer for IndiaFirst Life Insurance Company and another panellist at the forum.
He pointed out that outsourcing could be especially risky if asset owners concentrated those efforts on just one or two managers.
“If something goes wrong in a sector in a particular fund or a particular strategy, then all the people who have outsourced to them [would face] the same kind of risks,” he said.
Sridhar emphasised that insurers have to be held accountable for their investment decisions.
“If you are sourcing your money, you have to manage it yourself; you have direct accountability. You cannot outsource it [because] then it's like you have become an aggregator [of retail capital],” he said.
In Singapore, specifically, another hurdle for insurers seeking to outsource portfolios is regulatory red tape.
Pierre-Emmanuel Brard, chief investment officer for Axa Insurance in Singapore, said that the regulation behind outsourcing requires “so much work and governance to explain why we want to outsource externally – and this, on the team, can be quite a heavy load as well”.
The Monetary Authority of Singapore (MAS), for example, requires that financial institutions, including insurance companies, to ensure that each outsourcing agreement addresses the risks identified at the risk evaluation and due diligence stages while covering aspects of outsourcing such as the scope, monitoring and control.
There are likely to be regulatory hurdles to overcome in other jurisdictions too, not least in rival finance centre Hong Kong.
Though insurers have voiced concerns over engaging external managers, Asian investors were expected to outsource $1.2 trillion more by 2023 in an industry that already accounted for $11 trillion in AUM last year, according to a McKinsey report in October.
Larry Wan, the former chief investment officer of AIA China, said at AsianInvestor's 5th China Global Investment Forum in September that Chinese insurers, the smaller ones particularly, should outsource more assets to third-party managers to tap niche areas for more returns.
In a live poll at the Insurance Investment Forum, delegate opinion appeared to chime with Wan’s assertion with over three-quarters of them choosing “access specialist capabilities/expertise” as the key driver to consider when outsourcing more assets.
Some consultants have also told AsianInvestor that outsourced chief investment officer (OCIO) mandates make sense for asset owners with AUMs of up to $5 billion but that those with more than $20 billion in AUM are large enough to lead their own investment teams.