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Insurers investing more in alternatives to boost returns

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To boost investment yields amid record-low interest rates, life insurers are broadening their portfolios to include a wider range of asset classes.

To that end, they’re turning to external asset managers and operational service partners with expertise in nontraditional investments.

So reports SS&C Technology Holdings in its new survey, “2016 Global Insurance Asset Management Outlook.” The study polled 100 executives worldwide, including professionals in accounting, finance, operations, investments and technology at insurance and asset management firms. Nearly 3 in 10 respondents (29 percent, the largest percentage of those polled) work at life insurance companies.

Related: Reinsurance and insurance markets are changing rapidly

To which instruments do respondents intend to direct more investment dollars? The report flags several, including commercial loans, public equities, mutual funds and (especially) nonconventional “alternatives.” These include, for example, private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.

About one-third of survey respondents plan to increase their allocation of alternatives. Forty-five percent of large companies with assets under management topping $50 billion will increase their allocation. At small companies with less than $1 billion in assets under management, 55 percent of asset managers plan no change in their allocation of alternatives.

As insurers expand their investment focus, they’re tapping the expertise of external asset managers. More than 1 in 5 respondents intend to increase use of external managers in the next several years.

Almost three-quarters of companies with assets under management between $10 billion and $50 billion use both internal and external managers. Only about 1 in 5 manage all assets internally. Among all companies, 6 in 10 survey respondents use a combination of internal and external asset managers. Only 12 percent use external managers exclusively.

“Ultimately, skills and subject matter expertise are the driving force in selecting [an external] partner,” the report states. “Fifty-three percent of respondents reported that ‘deeper knowledge of specific asset classes’ most influence their decision to use external managers, followed distantly by ‘cost’ and ‘staffing.’”

Among the report’s additional findings:

      • Operational risk (31 percent), followed by market risk (22 percent) and cybersecurity risk (9 percent) are the top risk concerns of respondents.

      • More than half (56 percent) of those polled plan to boost usage of cloud and hosting providers and services, up from 50 percent in SS&C’s 2015 survey.

      • More than 6 in 10 respondents (62 percent) say that cloud technology is “critical” or “extremely critical” to their asset management strategy.

      • To manage investments, companies are shifting from internally developed IT systems to outsourced and vendor-provided solutions. Outsourcing, the favored approach, will jump to 35 percent usage within three years from 10 percent currently.

“While many considerations come into play when insurers weigh the costs/benefits of choosing a software-centric vs. outsourcing model for their investment-related systems, our survey reveals that staff skill levels, regulatory compliance capabilities and access to technology rise to the top,” the report states. “Across all firm sizes, the most important consideration for choosing an operational model is the availability of skilled staff to meet needs.”


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