One of the few pockets of growth for institutional fund managers over the last few years has been in the insurance market. Big insurance companies are increasingly outsourcing part or all of their investment management.
According to Neuberger Berman, one of the biggest managers with a specialist offering for insurance companies, only about 10 per cent of the estimated US$30 trillion in insurance assets is externally managed. It is a significant opportunity. Neuberger Berman has US$22 billion in insurance assets under management, across 113 clients, some of which are Australian. The Australian market, across life insurance, health insurance and general insurance, totals A$340.81 billion according to APRA figures for August this year.
Matthew Malloy, a managing director and global head of Insurance Solutions at Neuberger Berman, said on a visit to Australia last week that the insurance industry faced many challenges, not the least being the low-yield environment, coupled with increasing regulation in most parts of the world.
Neuberger Berman also has a dedicated insurance fixed interest head, Jason Pratt, and provides a range of services over and above investment management, such as asset-liability matching, strategic asset allocation, peer analysis, risk modeling and customized analytics.
Malloy, who is also head of North American consultant relations at the firm, says that insurance companies like to have a manager which has a perspective on their business before they begin to talk about investment strategies, which requires a level of resourcing and a consultative relationship.
As a rule of thumb, 80 per cent of insurance assets will be invested in investment grade fixed income and 20 per cent in growth assets – hence the concern about the low-yield environment.
A survey by the Economist Intelligence Unit in 2015 found that the most-commonly reported worry was the low yield on investments, with 73 per cent, closely followed by “restrictive” regulations with 71 per cent and then “increasing cost of capital”, with 35 per cent.
On the regulatory front there are no fewer than seven new regulatory regimes being phased in around in major economies, the big new one being “Solvency II” in Europe. The upshot of them all is to increase the cost of capital, in the same way as the major banks have been affected by regulatory change.
Australian insurance companies are among the best positioned in the world, alongside the UK, according to an assessment by Moody’s Investor Service, because of a low weighting to guaranteed products, indicating profits are unlikely to deteriorate even if interest rates stay low for the next five years. Among the most exposed to this risk are Germany, Taiwan, the Netherlands and Norway.
Malloy says a lot of investment product development in the future will be linked to insurance, offering some sort of base return plus a death benefit, due to the ageing populations of many developed markets.
* Greg Bright is publisher of Investor Strategy News (Australia)