So-called outsourced chief investment officer (OCIO) services are gaining interest in Asia and elsewhere, but the arrangement is unlikely to gain much traction among life insurers, say in-house insurance CIOs and industry experts.
That’s because the OCIO model – which involves externally delegating responsibility for some or all of a portfolio – is difficult to implement for businesses such as insurers, which have asset-liability matching (ALM) and complex internal actuarial models. In contrast, asset owners with fewer constraints, such as endowments and pension funds, can more easily outsource investment duties.
“I don’t think using OCIOs is feasible for an insurance company, from both an internal [portfolio-management] perspective and a regulatory perspective,” Thomas Spirig, CIO for Hong Kong and Singapore at Zurich Insurance, said.
Many banks and fund managers have carved out their insurance operations into separate units within their asset-management divisions because of the unique challenges involved, Hong Kong-based Spirig told AsianInvestor.
“It’s much more difficult for life insurers than the pure and unconstrained total-return approach of standard asset management.”
The ALM function and overall responsibility for risk and related functions remain within the insurance company, and that is the way it should be, he said, adding that this is in line with the prevailing view of regulators.
Ian Coulman, CIO of London-based terrorism risk insurer Pool Re, takes a similar view.
Speaking to AsianInvestor this month, he said his firm had no plans to employ an OCIO.
“There’s been a lot of talk about OCIOs but I don’t think it will happen in the insurance space,” Coulman added. “I think insurers and the regulator would prefer to have an in-house CIO dedicated to assets.”
If anything, regulatory requirements may push insurers to decide the asset allocation in-house, suggested Alexandre Mincier, Paris-based global head of insurance at US fund house Invesco.
Managing the allocation internally enables firms to match liabilities better because they know both sides of the balance sheet, he said, and improved ALM will be necessary with the onset of the new IFRS 17 accounting standard. The incoming rules govern the accounting treatment of financial instruments on the liability side of the balance sheet and must be implemented by insurers no later than 2022.
External asset managers would struggle to do this because they wouldn’t understand each insurer’s liability model, Mincier said, and it would be difficult for them even if insurers were willing to detail their liabilities.
Hence insurance firms' interest in an end-to-end OCIO service is likely to be quite limited, he argued.
Some OCIO providers admit that the insurance industry is proving less fertile ground than other segments.
Hong Kong conglomerate Jardine Matheson and Singapore’s Ministry of Home Affairs are each understood to have recently chosen to adopt the OCIO model for their entire portfolios, or at least for the bulk of them.
However, insurers are not showing much appetite for fully outsourcing their portfolios, Paul Colwell, head of the advisory group for Asia at investment consultancy Willis Towers Watson, told AsianInvestor.
“Insurers have very specific regulatory challenges in relation to reporting standards and capital charges,” Hong Kong-based Colwell said, “as well as internal challenges when it comes to the interaction between the actuarial and the investment sides of the business.”
This means it is less likely for insurers to outsource portfolios to OCIOs, despite the scope of investments they can offer, along with potentially lower fees for accessing them, he added.
That said, there is some insurer interest in partial OCIO services, he told AsianInvestor. This would entail them outsourcing certain investment strategies – potentially those that are operationally intensive, complicated and/or hard to access, such as private credit.
Likewise, Janet Li, leader of Mercer’s wealth division in Asia, covering the investment and retirement segments, confirmed she had also seen some interest from insurers, amid rising demand generally from smaller institutions in the region.
See the December 2018/January 2019 issue of AsianInvestor magazine for a feature on the nascent OCIO industry in Asia.
AsianInvestor will host an insurance investment forum in Hong Kong on March 12 and in Singapore on March 14.