The market with the most expected interest in fixed income and that will offer the most opportunities for external managers in the next 12 months is the Italian insurance market. More than a third of the Italian insurers Cerulli surveyed expect to increase their allocations to high-yield corporate bonds and green bonds over that period.
In Germany, nearly a third (30%) of insurer respondents intend to expand their investments in green bonds and sovereign bonds and 20% of local respondents will consider hiring external managers for government bond strategies in the next 12 months. French insurers are expected to grow their fixed-income portfolios in line with the European average, with green bonds providing the most opportunities for managers.

Outsourcing of traditional fixed income

European insurers typically have some ability to manage investment-grade fixed-income in-house. However, over the past decade, insurers’ fixed-income portfolios have gradually shifted away from government bonds toward higher-yielding corporate bonds, searching for greater returns. This has made it more challenging to run such portfolios internally. As the complexity of insurers’ fixed-income portfolios has increased, some have decided to outsource part of their traditional fixed-income portfolios to external asset managers. Nearly two-fifths (39%) of the insurers Cerulli surveyed outsource part of their traditional fixed-income portfolios, with the highest proportions in Spain (60%) and Switzerland (55%). In contrast, Dutch insurers are least likely to outsource traditional fixed income: only 15% of those we surveyed use external managers for such investments.

Given that fixed-income yields have picked up after a decade of low rates, some expect the outsourcing of traditional fixed income to reverse. However, this is unlikely. On average, 81% of the insurers that already outsource traditional fixed income intend to increase their outsourcing of such investments over the next three to five years. More German, Spanish, and French respondents plan to increase their outsourcing of traditional fixed income to external asset managers than Dutch or Swiss insurers over the next three to five years.

There are several drivers of insurers’ willingness to increase their outsourcing of traditional fixed income. Their increasing focus on diversification is one of them. Insurers that are looking to invest outside their local markets—in US or global credit, for example—typically do not have the right level of expertise or the capacity to hedge interest rate and currency risks. This makes for a strong argument to seek specialist fixed-income asset managers that do this regularly and that offer real scale.

Increasing demand for green and sustainable fixed-income products and strategies is another major contributing factor to the increasing outsourcing of traditional fixed income. Many insurers are seeking to transition to more sustainable fixed-income portfolios by increasing their exposure to sustainable bonds and to do so they increasingly rely on external asset managers. Finally, declining investment management fees have made outsourcing to external asset managers more attractive. The fees that insurers pay for external managers have fallen significantly over the past five years, encouraging insurers to seek best-in-class fixed-income asset managers that can help them navigate complex markets.

Preferred fixed-income asset managers

Client service is more important than ever when working with European insurers. Nearly three-fifths (58%) of the insurers Cerulli surveyed said that client service is the most important factor for them when choosing a manager. Large insurers place even greater importance on client service than small insurers (63% vs 40%). This is not surprising, given that insurers are resource-intensive clients and are increasingly asking for more non-investment services from their asset managers.