Insurers are responding to a more competitive market by unbundling their services.
Historically, insurance companies have tended to see value in vertical integration or keeping services in-house. As competition in the marketplace builds, this belief is changing. To compete, companies are unbundling their services, forcing each component in the supply chain to stand or fall on its own merits and outsourcing those not delivering the required performance.
This reassessment applies to fund management and to life insurance companies and their related savings, investment and pensions business. Increasingly, such companies are under pressure from distributors and customers to spice up their products. For fund managers, this may mean widening choice and co-branding products/funds with well-known managers. It also means providing access to the best performing funds and to global exposure and/or specialist fund offerings.
Insurers face a choice of losing exclusivity of a customer’s funds or losing the customer relationship. Given this choice, most insurers can be expected to offer a wider choice of funds. This has been a key lesson from the development of the 401(k) pensions market in the US – open platforms have become commonplace.
Life insurers in the UK have recently shown a strong tendency to offer access to external fund managers, with over 20 already doing so (see table below). Some have gone further and completely outsourced their fund management. It is understood some of the largest and most conservative will offer access to external managers.
At the same time many of the UK life companies retaining an investment function have moved it into a separate organisational structure (typically a subsidiary) and proposed it seeks institutional funds elsewhere. Stand-alone fund management operations can potentially compete more effectively in the open market for two reasons. First, they can build cultures and reward systems more compatible with competitors and secondly they become less associated with the brands and products of their parent company.
Unbundling may also be intended to identify additional value and make it more visible for external shareholders. Ultimately, at least partial ownership of such a subsidiary may be made available to shareholders and this could be particularly useful for a mutual as a way of raising additional capital.
In continental Europe, some major insurers appear to be moving down the same path. Allianz, for example, has established a separate fund management subsidiary (see page 10). As competition for savings, investment and funded pensions intensifies, it’s likely most insurers will feel the pressure to provide access to more fund managers.
Consultants are able to facilitate this process in a number of ways:
q by helping insurers establish what funds and risk profiles would be most suitable for the market positioning of their products. A topical consideration is the extent to which funds used should be actively or passively managed. They may also use asset liability modelling to design funds
q by identifying managers providing the required services and advising on selection. Major consultants have extensive global research data and experience of managers from large houses to boutiques. Such research includes detailed investigation into each organisation and an assessment of their ability to deliver in the future
q by helping the insurer to draw up appropriate agreements with external (and internal) managers including performance benchmarks, review periods and information requirements
q by participating in reviews, and arranging independent performance assessment and analysis
q by advising, where appropriate, on manager replacement.
Mike Wadsworth is a partner in the insurance and financial services practice of Watson Wyatt Partners in the UK