Insurers in Europe are exploring fixed-income asset classes in which they generally have little experience, thereby creating outsourcing opportunities for external asset managers, according to the latest Cerulli Edge―Europe Edition.

Faced with the prospect of an end to the era of low yields and the start of persistent high inflation, European insurance companies are re-examining their investment strategies. Under consideration are areas such as emerging market debt and private debt. Insurers lacking the necessary in-house capabilities will find it challenging to invest in complex asset classes.

52% of insurers across Europe plan to increase their use of external asset managers for their allocations to public fixed income—non-investment grade. In addition, 47% are considering making greater use of external managers for their allocations to private fixed income.

“Our research shows that subordinated/mezzanine debt, emerging market fixed income, and commercial real estate debt are where insurers are most likely to outsource new investments to external managers,” says André Schnurrenberger, managing director, Europe, at Cerulli. “Asset managers that can provide the know-how and experience needed to manage more specialized fixed-income investments can expect to see increased demand from insurers.”

Cerulli estimates that general account insurance assets outsourced to third-party, non-affiliated managers stood at around €1.5 trillion (US$1.5 trillion) at the end of 2021, accounting for 16.9% of total general account assets. This represents growth in outsourced assets of 4.1% year on year, outstripping the 3.1% growth in total European general account insurance assets. Cerulli expects outsourced assets to grow to almost €1.7 trillion by 2026, with the addressability rate increasing to 17.5%.

Cerulli’s assessment of the addressability of selected European insurance markets based on its proprietary methodology suggests that the German insurance market continues to rank highest in terms of nominal addressable assets, at €379.6 billion, and third in terms of overall addressability rate, with one of every four euros in the market outsourced to an external asset manager.

The UK is Europe’s second-biggest addressable market by total addressable assets, which reached €273.6 billion in 2020. The addressability rate is 21.9%. The nominal volume of general account insurance investments outsourced to external managers in the UK grew by 5.2% in 2020. Cerulli estimates suggest they will grow to €314.9 billion by 2026, with an addressability rate of 22.8%.

Other Findings:

• The use of technology in distribution varies between asset managers, with size being a factor. Cerulli research shows that asset managers making significant use of technology for data aggregation and predictive analytics are in the minority. However, 84% of the managers surveyed expect to increase their spending on sales-related technology over the next 12 months.

• Although emerging market countries share similarities, many people consider the term outdated, given the considerable differences within the group. For investors willing to take the risk, there are profitable opportunities to be had, but especially careful research is required.