The big question – how much of an insurer’s investment portfolio should be outsourced?

Three insurance company CIOs explain how they make investment outsourcing decisions, what level of outsourcing is right and which asset classes need to be kept in house.

Sara Benwellposted on Sunday, March 15, 2020

Jeremy Baldwin, Chief Investment Officer, AIG: I don’t think there’s any one unique solution to outsourcing, it really depends on the nature of your business model and the size, scale and complexity of your organisation. That’s the subtext that drives outsourcing decisions.

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

Essentially, we’re a big fixed income liability manufacturing house and we’ve identified both the liquid and private debt markets as being a core competence for what we try and look after internally.

"We try to think about where internally we can add value and where we can’t."

Beyond that I think everything is fair game and we look to outsource beyond those core competencies.

Over time if you realise that something that may have started as a relatively small allocation within your overall asset allocation becomes an increasingly important part then we would – and we have done this previously - bring people in.

But what we try not to do is add in a fixed cost structure from the outset where we don’t know how that’s going to evolve, because we’re all conscious of costs.

Underwriting profits are under pressure, investment returns are under pressure and you’ve got to be cognisant of the value that you’re extracting both in terms of return risk and diversification about what you’re adding into the portfolio.

Ian Coulman, Chief Investment Officer, Pool Re: There’s no right or wrong to this process, there’s different mixes - whether it’s fully outsourced or partially in-house or a mixture of the two.

We adopt a fully outsourced model. We think it’s more efficient from our perspective it’s more effective and it prevents conflict.

There’s only two of us on the investment team so we can leverage off the other managers. Certainly in the niche areas you need expertise and it’s not really effective from a cost perspective to bring in a team of experts.

Atanas Christev, Head of Investment, Direct Line Group: For us costs are a big driver and the search for efficiencies in our case probably comes at the potential expense of alpha.

We inherited a situation eight years ago where everything was outsourced and what we have done in the last three years is identify asset classes where we really think that a small, lean, in-house team could deliver the same results with a better overall fees to returns ratio.

[Back then] in terms of asset classes it was a very limited picture - mostly fixed income, mostly investment grade - and all these mandates were active.

"What we have done is identify asset classes where we really think that a small, lean, in-house team could deliver the same results with a better overall fees to returns ratio."

But we realised that as a low risk investor there were so many limitations on what the portfolio manager could do that in some asset classes, for example sterling investment grade it could hardly be called an active mandate

That’s one of the reasons that over the years we realised that it’s better to accept that situation and manage it as a book yield mandate and as a next step with sterling, we decided to bring this in house, but in a very measured way.

It’s a relatively small amount as a percentage of the total portfolio and it’s only sterling, we’re not trying to manage dollars or global portfolio mandate in house.

The one thing that has been very clear to us is niche, alpha generating classes is the one area where there is no point in trying to pretend that we can do it in house. These asset classes are outsourced, and they will remain outsourced.

 

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