Corner Office Views | Q3 2021
How Can Managers Combat Fee Pressure in the European Insurance Market?
Managers need a proactive approach
- Dutch, UK, and French insurers show the highest fee compression.
- The pressure on fee levels varies across asset classes, with little to no fee compression in private asset classes.
- Responding to fee pressure requires managers to assess fees by strategy, rationalize product ranges, introduce greater add-on services and customization, and take a proactive approach to setting and reviewing their fees for new and existing clients.
Justina Deveikyte, CAIA
Justina joined Cerulli Associates in February 2014 and heads the European Institutional Asset Management research practice. In her role, she is responsible for all research activities relating to institutional investors, the firm’s analysis of alternative investments, the newly created environmental, social, governance (ESG) section, and all data-science-based activities. She also contributes to multiple strategic consulting engagements and The Cerulli Edge series.
Justina is the lead author of several Cerulli reports, covering insurance, retirement, ESG, and alternative investments. Throughout her career, she has successfully developed partnerships with industry associations and has presented at several conferences and events across the Europe.
Prior to joining Cerulli, Justina was a Financial Manager and Global Analyst at Global Food Consulting; she previously has provided professional advice on banking products, including unit-linked insurance and third-pillar pension products at SEB Bank Group.
Full biography here.
Persistent fee pressure
Fee pressure remains persistent across the European insurance industry, with Dutch, UK, and French insurers showing the highest fee compression. In the UK, slightly more than half of the asset managers Cerulli surveyed said that they face either very high or high fee pressure from insurers in the UK. An additional 17% of respondents expect a significant increase in fee pressure in the market over the next 12 months. Managers that take a proactive approach to setting and reviewing their fees for new and existing clients, that build more holistic relationships with clients, and that rationalize and improve their product ranges stand to gain a competitive advantage.
Managers need a proactive approach to setting and reviewing their fees for new and existing clients.
Lower fees and greater fee pressure are, in part, a result of consolidation in the major European insurance markets. Although larger mandates allow insurers to move up the tiered fee structure, it also yields greater purchasing power, which results in greater fee pressure. In the UK insurance market, 14% of life insurers have ceased to exist since 2017 and the trend is similar across Europe.
Variation across asset classes
However, the pressure on fee levels varies across asset classes, with little to no fee compression in private asset classes. Although the traditional fixed-income space offers little room for additional fee discounts, fee pressure will increasingly play a role in alternative credit strategies. Around 27% of the asset managers Cerulli surveyed expect a slight increase in fee pressure for infrastructure equity and 40% expect a slight increase for private equity strategies over the coming years.
Asset Managers: Level of Change to Fee Pressure From Insurers on Private Investments in Europe by Asset Class, 2021
Global and European investment-grade credit strategies show greater fee pressure; high-yield and emerging market-focused strategies display less fee pressure. However, fee pressure will continue to grow over the next 12 to 24 months—around 12% of the asset managers Cerulli surveyed expect significant fee pressure for high-yield strategies.
Fee pressure will increasingly impact alternative credit strategies such as senior secured loans, trade finance, and real estate debt. Infrastructure equity, private equity, and real estate equity are the asset classes that currently see least fee pressure from European insurance companies. Only 27% of the asset managers Cerulli surveyed said that fee pressure is increasing in infrastructure equity and 50% said it is increasing in infrastructure debt. However, 20% of respondents anticipate declining fee pressure in infrastructure debt strategies.
Fighting fee pressure
The days of large fee decreases have likely passed, but because insurers are so focused on cost savings, fee discussions will remain a feature of the market for the foreseeable future. Responding to fee pressure requires managers to take a multidimensional approach that includes assessing fees by strategy, rationalizing product ranges, introducing greater add-on services and customization, and taking a proactive approach to setting and reviewing their fees for new and existing clients. Strategic partnerships can also help to improve the longevity of relationships and increase managers’ ability to cross-sell into higher-margin asset classes.
Asset Managers: Planned Actions Against Profit Margin and Revenue Loss in European Insurance Business Over the Next 12–24 Months, 2021
Focusing on higher-margin business can help asset managers alleviate pressurized margins. However, higher-margin business is not necessarily free from fee pressure (56% of the managers Cerulli surveyed said that fee pressure is increasing in emerging market debt), yet it can offer improved overall margins. Other asset classes where fee pressure is limited include thematic equities and sustainability products. One manager told Cerulli that its strong focus on thematic equities and sustainability has helped it increase its revenues from fees by around 20% in basis point terms.
Moreover, although marginal fee differences are not likely to clinch mandates, it is becoming more important for asset managers to consider fees at the outset when seeking opportunities. Asset managers should be proactive in reviewing and setting their fees for potential and existing clients. Although existing clients generally exert less fee pressure than new clients, benchmarking existing client fees against the industry and new internal fee agreements for similar mandates on a net performance basis can help improve the longevity of relationships. For new clients, managers should place greater importance on fee considerations at the start of engagements to help them determine the economic attractiveness of opportunities.
Rising demand for customization and add-on services is resulting in more nuanced price setting.
Finally, fee pressure is persistent, but rising demand for customization and add-on services is resulting in more nuanced price setting. Cerulli’s asset manager surveyed found that 53% of respondents see greater demand for add-on services and customization as somewhat of a challenge when growing their European insurance asset management business. Managers should seek to expand the remit of the mandate or include additional services before offering fee concessions. The additional services may include advisory relationships, strategic asset allocation reviews, or environmental, social, and governance (ESG) factor considerations.
Although managers may not consider fees at the outset of their product development initiatives, they should seek to diversify their revenue streams. In addition, having a product range that offers higher-capacity strategies at lower fee levels and capacity-constrained strategies at higher fee levels can help improve cross-selling opportunities and diversify business risk.
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