Increasing yields and rising inflation may put pressure on European insurers’ private investment programs in the short term, but increased market volatility, regulatory requirements, and growing environmental, social, and governance (ESG) reporting standards may create opportunities for asset managers, according to Cerulli’s report, European Insurance Industry 2022: In Search of Better Returns.

Cerulli’s research suggests that insurers will not turn away from private investments, but they will examine the strategies behind their allocations in the alternative space. Private investment programs are traditionally a key opportunity for asset managers due to the skill needed to source, understand, and execute on deals. Managers that can clearly demonstrate their capabilities and expertise in this space by identifying deals and deploying funds effectively will be considered reliable partners.

“In recent years, the persistent low interest rate environment has driven European insurers that have traditionally limited their investment to high-quality, unexciting credit instruments to search for yield and to invest in lower-rated and increasingly complex credit assets,” says Ross Langbridge, research analyst. “These insurers are now facing interest rate rises in addition to inflationary pressure. Asset managers that can help them navigate the impact this risk will have on their businesses, especially in the context of a new interest rate regime, will prove valuable partners.”

For some insurers, inflationary pressures have further increased the need for private investments to generate higher yields and outperform in the medium to long term. In addition, increased market volatility, regulatory requirements, and growing ESG reporting standards may create opportunities for asset managers.

The findings indicate that asset managers operating in the European insurance investment market see strategic partnerships as key to ensuring growth. Strategic partnerships enable managers to increase the longevity of their relationships with insurers and find greater opportunities to cross-sell into higher-margin asset classes. Partnerships with insurers can also allow managers to demonstrate their ability to manage different types of insurance mandates.

“Asset managers should keep in mind that strategic partnerships have value beyond pure profitability and cross-selling,” adds Langbridge. “Managers that can maintain successful partnerships with insurers and demonstrate that they can service sophisticated clients efficiently can use these relationships to establish their businesses credentials.” In addition, although fees for traditional fixed-income strategies are reaching a pricing floor, asset managers can still charge a premium in the alternative space. Managers that plan to build strategic partnerships may therefore prefer to focus on the alternative side, rather than traditional fixed income.