We have seen increased exposure to alternative credit, private equity, loans and infrastructure debt for example, which has allowed carriers to generate this increased yield, owing to the illiquidity premium or premium generated from the complexity of the assets.
“However exploring new asset classes and thus taking on multiple fund managers can prove challenging in today’s regulatory environment given the increased reporting burden following the advent of Solvency II.
All change…again: efficiency
“We are now seeing a full reversal where insurers are again trying to rationalise the number of fund managers they use.
Generating efficiencies around reporting, monitoring and governance across multiple asset classes frees up insurer members to get on with other tasks necessary to running a carrier. They want partners who are able to complement them throughout the whole value chain, from providing asset management expertise to efficient reporting and regulatory services.
Variety – access to the esoteric asset classes
”Increasingly insurers do not want to go to a series of boutiques for each of the more esoteric asset classes. We are finding that multi-asset is a particularly attractive option for smaller and medium-sized insurers, whose investment pots may be too small to justify a segregated mandate. Going into more esoteric asset classes can be a resource-intensive exercise. For smaller carriers, the costs associated with hiring investment expertise for all their asset class requirements, often results in much of the benefit generated being lost. If one partner can offer access to all desired asset classes these costs can be significantly reduced.
“In addition, multi-asset funds allow a certain degree of flexibility that is important for, for example property and casualty (P&C) insurers, who often have portfolio durations of less than two years. Smaller tactical allocations are also sometimes required for lines of direct lending to SMEs, especially in areas where the asset class is growing.
Discretionary mandates, satellites and a move towards total return
“Insurers will often have a core portfolio in fixed income designed to match the liability risk and usually made up of government bonds, investment-grade credit and some diversification. Here the guidelines are set in terms of target duration, target yield and target solvency capital ratio (SCR) budget. Carriers are also becoming more open to offering their fund managers discretionary mandates, allowing their investment partners more flexibility on when to enter, increase
exposure to and exit certain asset classes in a return seeking part of the portfolio.
“We have also noticed that in the request for proposals from small and medium size insurers, many are now asking for proposals to be presented on a total return basis, rather than aiming for a benchmark. Then there’s another type of discussion happening which looks at developing a satellite portfolio, which is there to grow the assets – here we’re talking about pure yield, total return, along with a volatility budget and the insurer’s SCR budget.
“The impression we get is that being an investment expert is no longer enough. As a true partner you have understand your client’s business needs to enable them to make better decisions – the investment, risk, economic, regulatory and accounting decisions.”
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