EFAMA KPMG Solvency II Report

4 WORKING GROUP FINDINGS | 47
Insurers will be concerned about the risk they are carrying on balance sheet and
there is likely to be a reduction in the level of discretion afforded to asset managers.
Mandates may well become more granular and prescriptive; for example, the asset
manager’s ability to generate additional return by including off-benchmark assets may
be restricted. Alternatively, mandates may delegate asset management decisions to
be taken not in a traditional risk / return framework but in a way that is sensitive to the
economic capital implications of the decisions as they are made.
Asset managers should consider whether they need to deploy specialist teams
focused on the needs of the insurers. As well as understanding the Solvency II
regulations, asset management decisions will be constrained by local accounting and
tax issues, rating agency considerations and other factors. Some fund managers will
simply not be equipped to manage asset portfolios when faced with such a complex
array of constraints to be managed simultaneously.
The use of specialist teams will also facilitate closer working relationships between
insurers and asset managers, so that decisions are made based on increased
communication and transparency and taking into account the best possible perspective
on investment opportunities. In an ideal situation, asset managers will be able to assess
for themselves the impact of possible decisions on the insurer’s capital requirements,
and will have a good understanding of the insurer’s risk management framework.
It would be sub-optimal for insurers to maintain these relationships with several asset
managers; it is far more likely that they will wish to select one or two asset managers
to act as strategic partners. These asset managers must be willing to invest time in
developing advisory capability, more sophisticated portfolio construction and risk
management tools, and customised reporting facilities.
Handled well, these changes will lead to longer-term relationships between insurers
and their asset managers; performance may no longer be assessed on rolling 3 year
performance relative to a standard benchmark but instead take into account the full
range of services provided.
Smaller insurers are likely to simplify the range of investment strategies they
employ, because there is no benefit in employing strategies that are outside the
insurer’s risk assessment capabilities. They may look to outsource their entire asset
management requirements.
Larger insurers are more likely to find that there are returns on investment in more
sophisticated strategies, for example those that rely on the pursuit of diversifi cation
benefits, those that impose a greater investment governance burden, or those that
are more dynamic in nature.
Insurers both small and large may consider the use of third party administrators or
platforms to simplify accounting and record-keeping, recognising the greater burden
of data governance and the need for more rapid and complete reporting.
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