Managing assets for insurers is a very profitable business. Assets managed on behalf of insurance clients are often referred as “sticky money.” It is also a business with high barriers to entry. Blindly getting into insurance asset management could expose an asset manager to high business risk. In this article I will
· Explain why it is a good business.
· Outline capabilities an asset manager must possess to effectively manage insurance assets.
· Identify the business risk. And
· Recommend using consulting firms like ours to help you reduce business risk and enhance the probability of success.
Why managing insurance assets is a good business?
1. Large asset base and AUM growth potential. Insurers tend to have a large asset base, including policyholder premiums and reserves. This provides the potential for AUM growth.
2. Long term horizon. The investment strategies are mainly driven by the need for cash flow from liability claims. Regulatory constraints and accounting treatments of gains and losses also contribute to the stability of investment strategies.
3. Opportunity. Small to mid-size insurers often lack the capability to invest assets by themselves. Outsource to asset managers becomes an important component of running the insurance business.
4. Diversification from other sources of AUM growth.
5. Competitive fee structure.
Key actuarial and accounting capabilities an asset manager must possess to effectively manage insurance assets:
1. Liability analysis based on projected benefit/claim payout patterns.
2. Asset allocation analysis and recommendation based on capital situation and income constraints.
3. Income and cash flow projection for financial and actuarial reporting, and capital adequacy test.
4. Continuously monitoring regulatory changes. Analyze their impact on asset allocation targets.
Business risk and the role of consultants for business risk management:
Asset managers must balance the benefit of having experienced actuarial and accounting resources in-house and the risk of getting stuck with a group of specialized expertise if the revenue becomes insufficient to support the business. It would be very costly if one builds such a team quickly, but the expected business opportunity does not come to fruition.
Utilizing consulting services can help manage the downside business risk.
Asset managers can acquire such senior expertise on a consulting base. The senior consultants can help fulfill the actuarial and accounting responsibilities while helping the asset manager develop young talents should the business take off successfully. Depending upon the performance of the business, asset managers could extend the contract term or simply let the contract expire. This is like building an in-house team plus a free put option on the business risk.
#Insurance, #AssetManagement#Risk
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