Asset managers are poised to benefit from a growing push to outsource investment management by insurance companies, says Moody’s Investors Service in a new report.
The rating agency notes that both North American and European property and casualty (P&C) insurers, and smaller life insurance companies, are increasingly outsourcing some of their investment management. And, it suggests that this trend is credit positive for asset managers, “because growth of their third-party assets under management will build a long-term, stable stream of fee income.”
Moody’s says that insurance companies, especially the small and mid-size ones, are increasingly looking for external advice on new investment opportunities. It notes that in Europe for example, the new capital adequacy regime known as Solvency II is “already significantly influencing” insurers’ investment choices.
“This new capital regime, which is scheduled to be implemented in 2016, applies capital requirements for every asset class, making some investments more attractive than others from a regulatory capital point of view,” it explains.
Cost is also a driver pushing certain insurance companies, especially smaller ones, to outsource, Moody’s says. “Insurance companies are increasingly weighing the cost of outsourcing against the cost of developing the expertise and infrastructure in-house,” it notes.
Moreover, the current investment environment remains challenging, Moody’s says, due to low interest rates and tougher regulation — and this may work to the benefit of asset managers, it says, as they “will likely continue to play an increasing role in helping insurance companies to implement a widening range of non-traditional fixed-income strategies.”
External asset managers can provide insurers with investment expertise, investment ideas, flexibility, and cost savings, that they may not be able to achieve on their own, Moody’s notes. And, it says that insurers have increasingly been turning to asset managers to diversify into asset classes where they lack expertise.
“Partnering with asset managers that have the right infrastructure and resources allows insurers to efficiently implement new strategies and fine-tune their tactical asset allocations. This is particularly relevant as investments become more sophisticated and include the use of derivatives,” it says.
Additionally, asset managers that specialize in insurance asset management are also offering advice on tactical and strategic investment solutions, it adds.