Asian insurance companies are set to continue giving out more external mandates in the years ahead and third-party managers with strong capabilities in passive and alternative investments are set to benefit the most as a result, according to a new industry report.

Although starting from a low base, addressable assets – assets that can be outsourced to third-party managers – are being registered by insurance general accounts (GA) at a faster rate than assets owned by other types of institutions, according to a report by Broadridge published this week.

The region's addressable assets in insurance GAs are expected to grow at a compound annual growth rate (CAGR) of 11.2% from 2019 to 2023 and are forecast to total $937 billion by the end of the period, Broadridge said. They grew at a CAGR of 16.5% between 2013 and 2018, compared with a CAGR of 12.9% for institutional assets as a whole.

The investment pot of Asian insurers is becoming larger due to a growing appetite among consumers for insurance products and the fastest-growing client opportunity is with third-party asset managers, Yoon Ng, Broadridge's director of Apac Insights, told AsianInvestor.

Broadridge's findings are based mainly on a series of interviews conducted between July and August with 16 Asian insurers managing assets currently totalling $1.6 trillion.
 
They also reflect how the prevailing low-yield global environment is forcing insurers to invest overseas and look into higher-yielding or cost-efficient strategies, which are better outsourced than managed internally.
 
The growing complexity of the investment landscape due to regulatory and accounting rule changes is another factor encouraging Asian insurers to use third-party managers, Ng said.

Against this backdrop, asset managers are building out their insurance asset-management capabilities to better position themselves to capture the attention of Asian insurance firms looking to outsource assets for better returns.

Average overall returns for outsourced insurance assets in the Asia-Pacific region range from 4% and 6%. The net investment yields for the largest Chinese insurers range between 4% and 5%

PASSIVE AND SPECIALISED MANAGERS

One area of opportunity for asset managers to tap these growing insurance GA assets is in passive funds. Facing cost pressures as well as in their efforts to reduce portfolio volatility, insurance firms are increasingly eyeing lower-cost exchange-traded funds (ETFs) and index funds, the Broadridge report said.

“We noted the growing use of bond ETFs amongst insurers in Taiwan and Singapore to name a few …they are largely looking for cost efficiency and beta returns,” Ng said.

Cathay Life, the largest lifer in Taiwan, has been raising its exposure to bond ETFs. It is investing about 5% of its investable assets in fixed income ETFs, a fivefold increase on the start of the year.

In addition, Asian insurers often seek external managers with experience managing insurance assets due to a lack of understanding in the risk-return characteristics and regulatory requirements of insurance companies, Ng said.

That's echoed by Natixis’s global survey of 200 chief investment officers and investment team members in international insurers, which was also released this week. In the survey, 89% of insurance investment teams said that regulations keep them from investing in alternatives despite their growing appetite.

As insurers grapple with the regulatory and executional complexity that comes with the search for higher yields and the move into alternative forms of investments, they are increasingly drawing on external expertise to access innovative and specialised capabilities, the Natixis report noted.