As European insurers move away from guaranteed products and towards unit-linked and hybrids, there is space for asset managers to step in, according to Cerulli Associates. Benedicte Gravrand reports
Low interest rates have made it very difficult for European life insurers to continue offering products with guaranteed returns. In response to the economic pressures, firms have shifted their mix towards unit-linked and hybrid products – a move that is creating internal disruption at insurers, and plenty of opportunities for asset managers.
In a report entitled European Insurance Industry 2016: The New Frontier for Institutional Asset Managers, Cerulli Associates, a global analytics firm, maps some significant changes in how insurers invest their general account assets and modify their products for consumers, just as their general account investments struggle to yield enough to cover the guarantees they have made to customers.
Non-guaranteed products rise
French insurers are among those pioneering this change. Home to Europe's largest insurance industry by general account assets, the country's insurers are selling more non-guaranteed and partially-guaranteed (hybrid) products, David Walker, director of European institutional research and author of the report, tells Insurance Asset Risk.
"In 2015, we show total net inflows into non-guaranteed products exceeded net inflows to life (general account) products," he says. "This is a truly seismic change in mind-set by a nation whose heritage has been far more about the certainty of insurance than about at-risk investments.
"Across Europe, assets behind guaranteed products still far outnumber the assets in investment products that insurers sell, but in the prominent case of France, more investment product was bought from insurers than guaranteed fare in 2015."
Partially guaranteed products
Some insurers are slowly venturing into the world of non-guaranteed products by launching partially guaranteed ones, which limit client participation in market gains and buy protection against loss, according to Cerulli. For some products, guarantees only take effect after set periods.
The emergence of part-guaranteed products means insurers' unit-linked unit and the general account unit will have to talk to one another, says Walker. This is a break from the separation of the past; unit-linked is viewed as an investment and buyer-risk product, unlike the general account, where an insurer deposits premiums from the policies that it underwrites and from which it funds the day-to-day operations of the business.
"When a guarantee was involved," Walker explains, "for which the insurer was 'on the hook', then the general account team would be involved. But for pure investment unit-linked work / distribution, commonly no guarantee would be offered, so it would be of far less interest to an insurer's general account team. It is where a product is part-investment, part-guarantee (putting the insurer, and end-customer, each partially 'at risk'), that the two units within the insurer will each take an interest."
Opportunity for asset managers
The hybridisation of insurance products is an opportunity for asset managers, who will find themselves having more conversations with both unit-linked and general account units.
Walker believes asset managers can help insurers in a number of ways, by improving the investment products they provide, by educating insurers on the retail market, and by providing advisory services. He says:
- If the investment manager provides an investment product that has an element of guarantee attached to it (for the life insurer to distribute to customers), that asset manager should be absolutely clear on the operation of that guarantee, and the conditions that must be satisfied for the guarantee to take effect. This is important so the insurer understands how the investment works, and so can sell it to end-customers with less chance of misunderstandings;
- When investment managers distribute their investment strategies via life insurers, they should be absolutely clear on the costs. In the Netherlands, unit-linked sales have been significantly dented by the 'woekerpolis affair,' a scandal revolving around the claims made about unit-linked products and hard-to-spot charges;
- There will also be opportunities to help educate insurers whose business previously relied on selling guaranteed products, about how to distribute investment products to the retail audience;
- And finally, as more life insurers enter the unit-linked arena, the incumbents may also seek help from independent investment managers in revitalising and reinvigorating the line-up of unit-linked products they offer. This would be more of an advisory service by an asset manager, than selling of product - though clearly it would open doors.
Asset managers have the opportunity to increase sales of their investment products in the European insurance industry, as insurers are opening up their platforms to allow customers to invest in competing firms' products within in their unit-linked offerings. And insurers' general account operations could also make more use of external asset managers' products.
"Guaranteed business may yet stage a comeback but in the near term at least, expanding into pensions and unit-linked business will be the growth drivers for many of Europe's diversified insurers," the Cerulli report concludes. "M&A may be the fate for small and specialised underwriters."