Insurance firms, including some in Asia, are moving to deploy fewer and larger investment mandates to improve their operational efficiency and reduce costs, and the advent of new reporting standard IFRS 9 will exacerbate this shift, say industry experts.

This trend – combined with the likelihood that insurers may view fixed income mutual funds as less attractive because of IFRS 9 (see box below) – spells trouble for these groups’ in-house asset managers, one Hong Kong-based insurance executive said. 

“The rationale for insurers to hold large portfolios in blended vehicles has diminished quite considerably,” said the individual, who asked to remain anonymous. This is largely because of ever-greater cost pressures and the prevailing low investment returns.

One portfolio manager at an insurer in Hong Kong told AsianInvestor his firm is moving to roughly halve the number of funds it allocates to, from 30 to around 15, largely for economic reasons. A $40 million dollar allocation or mandate could cost 40 basis points in fees, he explained, whereas for a $500 million portfolio the charge might be only 15bp.

That trend has come to the fore in the past couple of years, he added, because as investment returns have continued to drop, so it’s become more important to keep costs down.

ADDING MOMENTUM

IFRS 9, currently a major focus for insurers in Asia and elsewhere, has added to the momentum. Under the new standard, mutual fund investments will have to be booked according to their estimated fair value, likely leading to more volatile profit and loss. But securities held directly via investment mandates might not need to reported at fair value, as long as they satisfy certain criteria.

“We would be looking to make these [consolidation] changes anyway,” added the Hong Kong-based insurance executive, but now insurers’ chief financial officers will probably also be keen to see fewer fund allocations with a view to reducing the volatility on their P&L.

A Singapore-based insurance industry expert confirmed that insurers have been reviewing their positions in funds for various reasons, including that separate accounts allow greater flexibility and control around the underlying assets.

Bruce Porteous

Insurers are moving to consolidate mandates, chiefly to reduce costs and increase operational efficiency, confirmed Bruce Porteous, Edinburgh-based investment director for global insurance solutions at Aberdeen Standard Investments.

IFRS 9 will have some impact as well, he said, due to market valuations increasingly being required.

The British fund house is speaking to a European insurance group’s UK arm that wants to consolidate its four asset manager relationships into one. In due course the insurer will extend this approach across its business in Europe, Porteous said, declining to name the firm.

Such consolidation will take a while, because certain mandates are locked in for some time, he added, plus it’s a relatively complex process to switch mandates from one manager to another.

Regulatory pressure is also playing a part in driving the trend in some markets, he said.

On the regulatory side, Porteous said he knew of one European supervisor who felt that an insurer with, say, 50 different asset-manager relationships did not match up with the prudent-person requirement for managing money efficiently, and should reduce the number of managers it uses.

Porteous said fund and mandate consolidation is less of a trend among Asian insurers so far, but is set to pick up pace, probably starting with the Asian arms of European insurance groups.

WIDER IMPLICATIONS

Such developments could have wider implications for the in-house investment managers of insurance groups, the anonymous Hong Kong-based executive said.

“The shift to segregated mandates away from blended vehicles is a major problem for captive managers who have historically relied on the life funds [within their group] to bolster the size of the blended vehicles they sell to third-party investors.”

“Those days [of taking this approach] are basically behind us,” he said. “Either that, or insurer P&L volatility will be higher [as a result of IFRS 9] and therefore valuations [of insurance companies] will be lower. 

The upshot of all this? A reassessment of businesses and further M&A in the asset management space, he said.

There’s clearly no sign of insurance industry upheaval abating just yet.

IFRS 9 REQUIREMENTS

IFRS 9 governs the accounting treatment of financial instruments on the asset side of an insurance firm’s balance sheet (while IFRS 17 focuses on the liability side). The incoming rules must be adopted by insurance firms by 2022, though some observers still expect further delays.

At present, insurance firms in some jurisdictions, including several in Asia and continental Europe, have not been required to use fair-value accounting for fixed income assets.

But IFRS 9 will effectively force them all to use some form of fair-value accounting, said a Singapore-based insurance industry expert.

“Even if you choose to prove you are holding an asset to maturity, there’s still a below-the-line adjustment that’s meant to reflect the probability of default – which is akin to something close to market valuation.”

For further insight and analysis into how insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12 and its inaugural sister event in Singapore on March 14. For more information, please click here.