Is it time for insurers to adopt an outsourced CIO model?

Daniel Blamont, Head of Investment Strategy with Phoenix Group and Jeev Muthulingam, Head of Insurance Solutions at NN Investment Partners UK discuss whether insurers could adopt a fiduciary management approach in a post Solvency II universe

Insurance Investor Editorposted on Wednesday, October 23, 2019

Insurance Insider: Should insurers be looking at an outsourced Outsourced Chief Investment Officer (OCIO) model or simply just stick with using multiple third-party managers?

Daniel Blamont: Whichever way you go, you still need some internal expertise.

If we take the OCIO model, I want to offer a CRE mandate to an asset manager.

I still need to know enough about the asset class to be able to define what kind of risk appetite, geography sectors and ratings I would want to target.

Also, in terms of credit assessment, as an insurer we want an actual rating for this, although it doesn’t have to be an external rating, but it has to be a rating and valuation.

We can’t take this rating and valuation at face value from the asset manager as we must know enough to challenge it.

The bar in this area has been rising overtime.

In 2015 the asset manager could provide a rating if they felt it was applicable, but then the bar raised a bit more with the asset manager having to have a methodology that is aligned to the rating agencies.

We must oversee this and ensure that they follow this methodology. The bar has once again been raised, so now we need to know enough about the rating methodology to be able to challenge that rating.

Jeev Muthulingam: Having personally overseen and managed several fully Outsourced Chief Investment Office (OCIO) mandates across Europe, it is advisable to have appropriate segregation between risk taking and risk management throughout the investment management value chain.

Under an OCIO governance model, Solvency II’s prudent person principle encourages expertise is retained, demonstrated in-house and appropriate oversight is applied.

This means that in practice the insurer still needs to retain key responsibilities either internally or with the help of external consultants and take part in key investment decisions and risk management.

Broadly, outsourced investment mandates with elements of balance sheet management can be appropriate for certain insurers as part of a journey to transform/remedy legacy assets and ALM positions, which may require broader resources, multi-disciplinary teams and skillset than available internally.

In this context, it helps to work with an asset manager who can demonstrate credible track-record and experience in insurance asset management and a deep understanding of the balance sheet, especially when liabilities are complex, such guarantees, profit-sharing and in some cases combined with sensitive projected P&L distributions to the investment strategy adopted.

Daniel: I wouldn’t want to replicate what the asset manager does as otherwise there would be no point, but we need to know enough to carry on and challenge.

In terms of the requirements for origination and day to day management, the big issue there is around covenant and default management.

You also want an asset manager that can enforce covenance, to work out the loan if there are any issues in a way that is optimal and not just according to the asset managers view but also to our needs.

We need to know enough to be able to be party to that conversation.

This excerpt is taken from a roundtable: ‘What strategies are proving successful in driving returns from an asset allocation strategy and achieving diversification at the lowest capital cost?. You can read the full roundtable here.