European insurers’ outsourcing of investment management to non-affiliated asset managers continues to increase, albeit more slowly than in the past, according to the latest issue of The Cerulli Edge―Global Edition.

The strategies being outsourced fall mainly under the umbrella of alternative investments and Cerulli anticipates a reduction in the number of insurer-manager relationships in traditional asset classes.

“European insurers’ increasing appetite for private markets will lead them to appoint more external managers, especially in the Nordic, Swiss, and Italian insurance markets,” says Justina Deveikyte, Cerulli’s director of European institutional research.

In 2020, 25% of the European insurers Cerulli surveyed expected to cut back on the number of external asset managers they worked with and just 6% planned to increase the number. This year’s survey found that only 11% of insurer respondents plan to reduce the number of external managers they work with over the next 12 to 24 months; 19% intend to expand their manager lineups.

Cerulli estimates that assets outsourced to third-party, non-affiliated managers stood at around €1.3 trillion (US$1.5 trillion) at the end of 2019—approximately 16% of industry total general account assets. “We expect outsourced assets to grow to more than €1.5 trillion by 2025,” says Deveikyte.

As European insurers expand into risky assets and alternatives in search of better yields, they will seek external investment expertise. This will increase opportunities for asset managers across the region’s insurance general account market, which was estimated at €8.5 trillion as of 2020. Not only will insurers continue to look beyond their internal teams and affiliated managers, they will also seek the skills of managers with specialties in nontraditional and international investment.

As a result, most additions to lineups will be concentrated on the alternative portion of insurers’ portfolios. At the same time, the number of relationships in traditional asset classes will continue to fall over the next 12 to 24 months. Consolidating manager lineups in traditional strategies enables insurers to reduce their asset management fees and subsequently allocate their risk budgets to strategies in private markets, where managers are more likely to add value.

Smaller insurers already under-allocated to alternatives will be most keen to add asset manager relationships. Larger insurers that already invest in a broad range of asset classes will likely maintain the same number of asset managers over the next 12 to 24 months. According to the research, insurers will not drastically cut the number of asset managers they work with—they typically aim to have a handful of asset managers per asset class.

Smaller European insurers manage most of their traditional fixed-income assets in-house. However, given the persistent low-interest-rate environment and the focus on cost efficiency, some have started outsourcing more of their core fixed-income assets. One-third (33%) of the European insurers indicate they will consider increasing the outsourcing of their core fixed-income strategies over the next three to five years.

Other Findings:

• In the U.S., insurers that were previously reluctant to outsource are engaging with investment consultants and forming strategic partnerships. As alternatives become a bigger part of the solution for insurers of various types and sizes in the U.S., Cerulli expects managers, analytics and service providers, and insurers to come together in diverse structures—including joint ventures, buyouts, mergers, and strategic partnerships.

• In Asia, distributors are paying more attention to long-term assets under administration growth and deepening collaboration with managers in renegotiating trailer fees, promoting C-share classes, and co-launching digital marketing campaigns.