Case study: How AIG makes outsourcing decisions

Jeremy Baldwin, Chief Investment Officer at AIG explains how the firm decides what to outsource and what to keep in house

Sara Benwellposted on Friday, February 14, 2020

Jeremy Baldwin, Chief Investment Officer at AIG

Sara Benwell: What are you outsourcing currently and how did you make that decision?

Jeremy Baldwin: I don’t feel that there is any one unique solution to outsourcing as it really depends on the nature of your business model, the size and scaling complexity of your organisation etc., which are a few of the factors that drive outsourcing decisions.

As a broad, multinational, multi-line insurer covering both life and P&C we try to think about where we can add value internally and where we can’t.

Essentially, we are a big, fixed income liability manufacturing house.

I look after a global investment portion of this, but it is fair to say that we have identified both the liquid and private debt markets as being a core competence for what we try and look after internally.

We look to outsource beyond these competencies. Over time, if we realise that something that started as a relatively small allocation within our overall asset allocation has become an increasingly important part, then we bring people and teams in.

We try not to add in a fixed cost structure at the outset when we don’t know how it is going to evolve.

We are all conscious of costs: underwriting profits and investment returns are under pressure. So you have to be cognisant of the value that you are extracting both in terms of returns, risk and diversification by what you are adding into the portfolio.

Sara: Could you ever imagine outsourcing everything?

Jeremy: Never say never, as the margins in the industry are atrocious and they are going to be under further duress if the rate backdrop stays relatively repressed.

You have to be constantly concerned about the fee alpha ratio that you are delivering.

I would think about niche areas or even some of the private markets which are interesting. We are desperately trying to hang onto them because manufacturing assets in these areas is quite difficult and deploying amounts of capital in certain illiquid private asset classes can also be difficult.

The asset management industry often paints a rosy picture of being able to get money in when it comes to us, but we see a very different picture.

It can be hard to get average levels of funds deployed on an allocation for certain asset classes.

We try to adopt a pragmatic approach even if we have an internal team. We may countenance pushing money out in a similar asset class for a time period because we need to allocate to that asset class and getting money in and working can be extremely difficult.

Different managers may have different access to different markets or capital pools that we may not have, which could provide an advantage to me as a representative of a client trying to deliver a particular return in the portfolio.

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