Possible Rate Rise Favors Alternatives

Insurance general account assets are trending towards expanded use of alternative investments, says new Cerulli Associates research, accelerated by an anticipated rise in interest rates.

The trend may be of interest to 403(b) plans that hold a lot of annuity contracts, as well as other retirement plans that use stable value funds and other guaranteed fixed-income investment products that involve close relationships with insurance providers. Low interest rates and regulatory constraints are putting pressure on insurers to achieve adequate returns on invested capital while staying within strict risk budgets, according to Cerulli.

Alternative investments still comprise a relatively small portion of total assets held by insurers’ general accounts, says Alexi Maravel, associate director at Cerulli. However, large insurance companies are clearly accelerating their direct investments in asset classes like private equity, real estate and infrastructure. Cerulli has reported on similar trends within both defined contribution (DC) and defined benefit (DB) retirement plans. 

“Much like other institutional investors, insurance chief investment officers and other investment professionals are using alternatives for diversification of investment risks, as well as seeking non-correlated sources of returns,” Maravel adds.

“Insurance General Accounts: Opportunities in an Underserved Market” also notes insurance companies are showing a greater interest in outsourcing investment functions to institutional asset managers. Cerulli’s report suggests this change in outlook may lead to the movement of billions of dollars in assets under management in the coming years.

For investment professionals, Cerulli suggests proficiency in key areas (such as risk management, investment strategy design, and asset allocation) are critical to winning business.

The asset management industry and insurance providers anticipate a number of key challenges as they increase use of alternatives, Maravel explains. 

Alternatives managers that work with insurance companies privately cite regulators’ lack of understanding of limited partnerships and other alternative structures, he says. Another issue: insurers’ internal investment professionals and investment committees need more insight into what prevents the use of alternatives in insurance investment portfolios.

Even with these challenges, the general adoption of alternatives among different types of insurers has steadily grown over the past few years, Cerulli says. Several asset managers have even made acquisitions to the end of bolstering their alternatives capabilities to better serve insurers, as well as other institutional clients.

The research also shows that insurers' need to maximize yield and total return causes them to hire outside asset managers with specialties in asset classes where they lack expertise. They are also targeting best-of-breed managers in specialized searches. Cerulli advises third-party asset managers, investment consultants and other firms to carefully evaluate their relationship with insurance general accounts in order to take advantage of these trends. 

Data underlying these findings comes from a survey of insurance asset managers and investment consultants overseeing $1.2 trillion in insurance assets representing a majority of outsourced insurance general accounts assets under management, Cerulli says.

Information on how to obtain a copy of Cerulli’s report on insurance general account opportunities is available here.