The Spence Johnson Blog

By Will Mayne, 3 December 2013Market Intelligence | Insurance Asset Management

Myth buster – There’s no money in managing insurance assets

This blog has already featured our analysis on European Insurance Asset management and the €420 billion being managed by external managers. Despite the scale of the opportunity a number of our asset manager clients have expressed mixed feelings about managing insurance money and, in the extreme, consider it not worth the effort.

This blog aims to shed some light on the murky world of insurance and explain why we think it’s changing and creating a very compelling business case for asset managers.

1.  “it’s low margin, high volume business…not what we’re after at all” – Managing ‘core’  insurance assets is indeed low margin, with charges around 8-12 basis points and an elevated cost base. Managing the ‘satellite’ assets is however a very different story. Insurers are diversifying into new asset classes like infrastructure, high yield debt, commercial loans and emerging market debt. This has created attractive revenue opportunities with significant margins for the taking.

2. “the client touch is very onerous, we don’t have actuaries and don’t manage insurance risk” – Asset managers do indeed need to speak ‘insurance’. But this needn’t be the fluency required by the managers looking to take on fully delegated arrangements. Asset managers need to consider insurance specific reporting and data requirements but the investment is well worth the reward. Our research shows that once insurers are satisfied that their external managers can meet the requirements then they’re more likely to use them again and again, saving on the due diligence leg work.

3. “some of the most disappointing meetings I’ve had in recent years are with insurers” – A frustration felt by many asset managers in their dealings with insurers is that they’d listen very politely and then not be prepared to follow up, or in fact, implement the ideas internally. Our research indicated a similar story. The low yield environment forced insurers to look for new ideas and so they reached out to asset managers. Many then didn’t act, hoping to ‘wait it out’ and return to their old ways. The persistence of a low yield environment and Solvency II coming steadily into view has forced many of these insurers to move beyond conversations and are now acting. Others, who tried their hand at new strategies internally, encountered costly issues and are now ready to look for external partners. We would urge our clients that the conversations taking place now are very different.

See our European Insurance Asset Management market intelligence report for more details 

By Nigel Birch, 3 July 2013Market Intelligence | Insurance Asset Management

The growing opportunity for Europe Insurance Asset Managers

The European Insurance asset management market is complex, opaque, and frankly rather confusing – especially when seen through the eyes of asset managers.  We believe this does not have to be the case and have focused on demystifying this market and describing the growing opportunity that exists for asset managers.

It is generally understood that the insurance market is really very big indeed. The total assets of European insurance companies are €9.1 trillion. That is enough matchsticks, stacked end to end, to reach to the moon and back 500 times!

Importantly however, for those who are still reading and not already penning their business case, the total figure means nothing very much at all for asset managers. For this figure includes intangible assets, accrued income and debtors for example. A much more sensible figure for this market would be ‘total investment assets’. This definition puts the market at €8.5 trillion, but sadly this still includes life assurance assets, like unit linked policies, which despite their insurance wrapper are not ‘freely investable’ insurance assets at all. So, after we remove these too, we are left with ‘general account’ assets; a figure of about €6.3 trillion which probably most accurately describes the size of the European insurance asset management market today. 

More importantly, when presenting the opportunity for asset managers, just sizing the market is not enough. Large insurers often have affiliated asset managers who, while in principle could lose their affiliated client, don’t tend to all that often. Importantly these insurer affiliated asset managers tend not to outsource much to third party asset managers. Moreover, insurers also tend to invest a large proportion of their assets directly, by purchasing government bonds for example. When we get to the asset class level, liquidity is king in certain segments of insurance, making cash funds a significant part of an insurers’ portfolio. Long duration is also an important investment objective, especially for the life sector making fixed income products very popular across the market - especially in France where fixed income alone account for over €1.3 trillion. In fact each of the European markets has its own unique characteristics with quite different life/non-life splits and different asset allocations and regulatory frameworks.

The upshot is a smaller than expected revenue opportunity for asset managers which is already dominated by a few market leaders. Despite this, our new research suggests this is changing, and that recent drivers are increasing the opportunity for insurance affiliated and non-affiliated asset managers in the European market.