Private debt is a growing area of investment for insurers, but they should perhaps avoid managing such a complex asset class in-house, argues James Hughes, group chief investment officer at HSBC Insurance.
He was speaking at AsianInvestor’s inaugural Insurance Investment Summit in Hong Kong last week, on a panel on how to structure internal teams, and whether and how to outsource investments.
“One area where regulators would may be incredibly concerned is if insurers suddenly became private debt experts and started doing all that in-house managing such a complex asset in-house,” says Hughes. “The difficulty in terms of the of managing private debt market is many times that of the listed market given the availability of information.
“You could find yourself in a situation where you need as many lawyers as CFAs, because any time something goes wrong, it may become a work-out situation. Then it becomes more about the legal aspects and the contracts – as it’s not rectified by a simple change in rating.”
“[Private debt investing] is something you should strongly consider outsourcing to ensure you achieve best practice,” he notes.
Yet insurance firms must be particularly careful when outsourcing investments, says Hughes. “It comes down to having a very clearly defined mandate, with all the different parameters very well structured.”
The contract between fund manager and insurer has to be very open and interactive, he notes. This is because its long-term return forecasts can change, due to the nature of an insurer’s balance sheet, product design and the long-term nature of the business. This will require active restructuring of the mandates and hence the contract needs flexibility, “so that interaction has to be there”.
“Any fund manager that’s ever spoken to insurance companies about managing assets is likely to be incredibly frustrated with the time it takes for them to make a decision,” adds Hughes. “This is natural, because there is nervousness [among insurers] around this day-to-day interaction, around what has to happen.”
One thing insurers do not typically outsource, however, is their core asset-liability management (ALM), he notes; regulators would have concerns if this wasn’t managed by the business.
Insurance firms can’t outsource fiduciary responsibility – they remain ultimately responsible for all aspects of the business, whether managed internally or outsourced, says Hughes. “You are the person in control of that, and so you should be. Hence the decision-making falls on you.”
Most of HSBC Insurance’s $95 billion in assets are in Asia, chiefly Hong Kong, followed by France, the UK, Brazil, Mexico and Singapore.
Arnaud Mounier, Asia CIO of Axa Insurance, echoed this view while speaking earlier in the day, saying he “owned” ALM at his firm.
Of course, an insurance firm’s ability to outsource varies depending on its home market. For instance, Indian insurers must manage all their assets in-house.
As a result, their internal structures need to be identical to that of a fund house, notes AK Sridhar, CIO of IndiaFirst Life in Mumbai, speaking on the same panel as Hughes. “They have category specialists, analysts, a dealing desk,” says Sridhar. “We need to demonstrate we are no different from a typical asset manager.”
The asset classes open to Indian insurers are restricted to the bond market, equities and to a very limited extent derivatives. They are prohibited from alternatives such as commodities or property, says Sridhar.
Moreover, when an Indian insurer go to the public with a product, the regulator wants to know how it compares to its peers in terms of internal structure, governance and processes and so on.