How Insurers Can Succeed with Alternative Products

We recently held a webinar with Barings on Maximizing the Yield Potential: Insurers & the Future of Portfolio Finance. This started me thinking about a trend I’ve been seeing for the last couple of years – how asset managers are doing more to offer targeted portfolios to insurance companies and other asset owners.

More and more managers are developing multi-asset class, sophisticated portfolios that are structured to meet the needs of insurers. Correction – to meet the needs of each of their insurance clients depending on their performance to risk needs.

Key to this is understanding a regulatory requirement that is unique to insurance: long-term exposure to meet their obligations to their policyholders. Yes, insurers want yield and a higher rate of return. But – maybe even more than that – they need to control their risk and portfolio exposure.

So, alternative or private assets are an ideal development for insurers. First, these diversified portfolios are designed to be low risk. They usually span multiple, uncorrelated sectors and industries – from companies and art to aircraft and infrastructure. This spreads out the exposure types and minimizes risk. Additionally, the portfolio is pre-built and tailored for each client, allowing insurers to access appealing liquidity pools and instruments without investing in highly specialized teams or skills. The “only” thing insurers have to do is focus on the performance monitoring of their portfolio.

That last point is where the challenge comes in, because of course it’s not that simple. There’s a gap between the performance and accounting data that the asset manager can deliver and the data that the insurance client needs. After all, insurers still have to run their books, make allocation decisions, monitor the investment pipeline, validate the cashflows, value the assets and report to regulators and stakeholders. Frankly, that’s an understatement. It’s much more challenging if you’re investing in sophisticated instruments, because they require complex accounting and modeling.

But just as insurers don’t need to hire people to create their specialized portfolios, they don’t need to hire them to handle accounting and modeling, either.

The right partner can do that for them – across multiple asset managers and through a single platform. No matter how diverse the portfolio or the number of asset managers, taking a unified approach makes it easy to consolidate reporting, monitor its performance and cashflows, ensure it meets compliance and risk requirements, and manage it all in-house. And having that partner’s expertise is especially valuable when regulators are less familiar with the investment vehicles – as they generally are with private instruments.

But in some ways, private markets are no different from other types of finance; consistency in accounting is always essential to monitoring portfolio performance and staying on top of allocation targets.

So, whether you’re already investing in private markets or just curious to learn more, discover how we’re helping insurers succeed with alternatives.