What insurance CIOs want from external managers

Investment heads at insurance firms such as AIG and Pool Re discuss the benefits of outsourcing portfolios and what they look for from asset managers.
What insurance CIOs want from external managers

Some insurance executives feel the time is ripe to make more use of external asset managers, in light of factors such as the ever-growing need for a wider range of expertise, the growing regulatory burden on investment teams, and downward pressure on manager fees.

Others, meanwhile, are already sold on the idea of outsourcing most, if not all, of their portfolios and discussed what they look for from external partners at a recent industry event in London.

In the former camp is Achilles Sofroniou, who until November 28 was co-chief investment officer of London-based insurer and reinsurer Canopius Group.

Achilles Sofroniou, Canopius

On that day he suggested to the audience at the Insurance Asset Management Conference in London that the industry should perhaps be re-examining the question of investment outsourcing.

Pointing out how underwriters are having a difficult time – with margins at very low levels – and taking a lot of risk on the liability side, he said: “I think now is a great time for there to be a change in how insurance companies deploy their capital.”

The regulatory environment is changing and resource requirements are getting increasingly onerous, Sofroniou said. A three- or four-man investment team is now insufficient, he noted. “You need an ESG [environmental, social and governance] specialist, you need an SCR [solvency capital requirement] specialist, you need a mandate selection guy, a strategist [and so on].”

Insurers are seeing more internal resource requirements for managing investments – such as ESG criteria and stewardship codes – and are not really sufficiently prepared for these, he added.

Hence, the questions insurers asked themselves three or four years ago need to be asked again, Sofroniou said: “Should we outsource or should we bring a lot of this management in house?

“I think we're at a tipping point where maybe – and this is my own personal opinion – we might say we brought too many assets in-house and maybe the cost savings are not as great as we thought they'd be,” he said.

What's more, fee pressures mean asset managers are offering mandates and products at lower cost, Sofroniou added.

Insurers tend to agree that it makes sense to use external managers for – at the very least – more specialist asset classes or for newer asset classes they are moving into. They also have definite ideas about what they do and do not want when they outsource.


Jeremy Baldwin, CIO for Europe, the Middle East and Africa at AIG, said his firm tries to avoid “a fixed-cost structure from the outset”, speaking on a panel at another London event on November 14.

Jeremy Baldwin, AIG

“We're all conscious of costs,” said Baldwin, who oversees a $24 billion portfolio. “Underwriting profits are under pressure, investment returns are under pressure, and you've got to be really cognisant of the value that you're extracting."

Another issue Baldwin saw as important is an asset manager’s level of understanding of an insurance firm, and the impact that an individual investment will have on the overall portfolio return as opposed to the asset return in isolation.

“[With that in mind,] it's important that a manager really understands how an insurer works," he said during a panel at the Insurance Investment Summit hosted by Clear Path Analysis on November 14.

Asset managers tend to be heavily return-focused, but less appreciative how the asset side interacts with the liability side of an insurer's balance sheet, Baldwin told AsianInvestor by email.

The same panel also addressed the question of whether asset manager size was important in an insurer's selection process.

Ian Coulman, CIO of terrorism risk reinsurer Pool Re, which outsources all of its investments, said it was just one factor in the RFP process, alongside criteria such as performance, team stability and longevity, track record and stability of strategy.


But size of manager can be important, he noted during the same panel discussion. “In investment-grade fixed income, you want the manager to have a depth of resource and expertise and access to market, to be able to access the right issues at the right level at the right time.”

However, in niche areas “sometimes smaller asset managers can be better, as they are more focused on that specific strategy, whereas a larger firm offers it as just one product", Coulman said. “If it's not profitable for that large manager, they may not be deploying all the necessary resources to be able to deliver [the best] returns.”

Also speaking on the panel, Atanas Christev, head of investment at UK-based Direct Line Group, agreed that small managers could be beneficial.

“You're not looking for sheer size, but you are looking for access to markets," he said. "The fine balance between assets under management and access to markets is not one-to-one. They can be relatively small in a particular region and still have pretty good access because they have the expertise in that area.”

With more commoditised products, such as investment-grade fixed income, it can make sense to seek out the larger players, he said.

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