How can managers grow strategic partnerships in Europe’s insurance industry?
Driven by the need to improve operational efficiencies and profits, insurers are increasingly consolidating their relationships with external asset managers.
The way insurers engage with asset managers is changing. Driven by the need to improve operational efficiencies and profits, insurers are increasingly consolidating their relationships with external asset managers. Managers also increasingly prefer partnership-type engagements as a result of fee pressure and growing consolidation across the industry.
Cerulli’s Insurer Investment Survey found that one-quarter of European general account insurer respondents plan to decrease the number of external asset managers they work with over the next 12 to 24 months. However, this number is much higher in France, where almost 40% of respondents are considering decreasing the number of managers they work with. These results are in line with last year’s findings, which showed that more French and German insurers were considering reducing the number of external asset managers they worked with.
Size is also important when it comes to consolidating relationships with external asset managers. Cerulli’s research suggests that the largest insurers—those with AUM of more than €50 billion—are keen to consolidate their relationships with asset managers, as are the smallest insurers—those with assets of less than €5 billion.
Insurers: Expected Changes to the Number of External Managers Used for General Account Mandates by Insurers' Country, 2020
Source: Cerulli Associates
Under the strategic partnership model, insurers have relationships with fewer managers and each manager has wide discretion. In exchange for the broader mandate, the manager must provide more in-depth input to the client. Strategic partnerships require a variety of services beyond basic investment management, including strategic asset allocation optimization, Solvency II optimization, risk and scenario analysis, liquidity analysis, technology provision, and specialized investment accounting and reporting services.
Although there is no clear definition of strategic partnerships, some asset managers tend to define all of their relationships with insurers as strategic partnerships. However, Cerulli believes that the key criteria that define a partnership are the depth of service provided and the proportion of assets managed on behalf of the client, rather than an AUM threshold of €0.5 billion or €1 billion.
Although it is difficult to estimate the size of a typical strategic partnership engagement, Cerulli’s survey of asset managers found that partnerships tend to be preferred by smaller insurers and that the average size of strategic partnership mandates range between €1 billion and €25 billion.
Building long-lasting strategic partnerships will be the priority for many insurance asset managers over the next three to five years. Cerulli’s survey of asset managers found that 27% of respondents expect to significantly increase the number of strategic partnerships they have over the next three to five years. Another 67% believe that the number of strategic partnerships they have will increase slightly over the same period.
Asset Managers: Expected Increase in Number of Strategic Partnerships With Insurers Over the Next Three to Five Years, 2020
Source: Cerulli Associates
Asset managers will also find partnership opportunities in the unit-linked insurance industry. Some insurers are keen to partner with managers to develop innovative funds for their unit-linked products; others prefer to partner with managers that can offer extended technological and distribution capabilities. For instance, in 2017, DWS Group teamed up with German insurer Volkswohl Bund Lebensversicherung to offer fund-backed life insurance products via its digital platform.
In addition, there will be an increasing number of strategic partnership opportunities for external asset managers who can demonstrate the ability to develop ESG products (e.g., low carbon products that reduce carbon footprint by 30% compared with the benchmark) and provide assessment of climate-related risks such as transition and physical risks in insurers investment portfolios. Asset managers should leverage their advisory capabilities when building such partnerships.
Cerulli expects strategic partnerships to become more common, although only the largest insurance asset managers that have insurance solutions teams will be able to seize such opportunities. Insurance companies want to work with managers that understand the complexity of the environment and prefer managers with experience managing insurance assets under Solvency II constrains.
Asset managers aiming to secure strategic partnerships with insurers should be willing to accept fee cuts. The managers Cerulli spoke to said that strategic partners can receive fee discounts of 20% or more. One large local manager in Belgium told Cerulli that, to build its first strategic partnership with a mid-sized insurance company it had to offer a significant discount. However, scaling up such engagements can help to ensure the stability of revenues for managers.
Managers with both scale and dedicated insurance solutions teams are best positioned to commit time and resources to partnerships with insurers. One large French asset manager told Cerulli that partnership engagements can involve weekly committee discussions and quarterly and annual reviews to discuss business changes, governance, risk, and performance. Though most contact will be with the CIO, the CFO and CEO will also be involved, albeit less frequently, and there is often ad hoc contact with the wider investment team.
Insurance asset managers that are part of banks are among the ones that will benefit the most from the growing demand for strategic partnerships. For closed insurance book acquisitions, much work is undertaken before deal completion—asset managers can leverage their M&A teams to provide valuation and portfolio analysis to help the acquiring party assess feasibility and negotiate pricing. Relationships with consolidators can be intensive as a result; however, those offering the best solutions are sure to gain to a share of assets once deals are closed.