By Gary Shub and Team at The Boston Consulting Group (BCG)
The quest to diversify assets as insurers hunt for higher returns in a low-interest-rate environment suggests that there might be a significant opportunity for asset managers—both independent and insurance owned—to curate and offer alternative investment products for small insurance companies in the US.
Although alternative investments have expanded quickly as an asset class among larger US insurers, relatively few small carriers have direct access to alternatives. That’s because small players lack the scale and resources to properly assess and manage alternative providers and products—or to oversee the complex issues of diversification. A targeted offering from asset managers would allow small insurers to benefit from alternatives’ potentially higher returns and greater diversification without having to allocate the billions of dollars in investments that are usually required.
Such third-party offerings could fit well with the recent trend among asset managers to profit by providing outsourced chief-investment-officer (oCIO) solutions for insurers. Instead of focusing on specific mandates within asset classes, oCIO solutions target all of an insurer’s assets and liabilities and offer asset liability management and strategic asset allocation for their customers. In the case of alternatives, this would include determining the optimal exposure to alternatives—taking into account the structure of liabilities, risk, and capital allocation of the entire asset base.
For asset managers, offering oCIO services is an opportunity to monetize investments in data, analytics, and risk management capabilities that they already are undertaking on their own behalf.
Asset class growth
Alternative investments have grown significantly as an asset class among US insurance companies, increasing from 3.8% of insurers’ general accounts in 2008 to 5.4% in 2014. That represents a net inflow of roughly $150 billion—nearly double the total value of alternatives held in 2008.
However, those alternative investments are heavily concentrated among the largest carriers. In life insurance, the five leading carriers of the roughly 800 US life insurers account for more than half of all alternative investments. In property and casualty, alternative investments are similarly concentrated among the largest carriers.
Whether or not large insurers are nearing a saturation point in alternatives, smaller insurers have ample room to expand their relatively modest allocations tremendously before reaching similar levels.
*This is an extract of from the 34-page 2016 Global Asset Management report, which you can read here: