Given the last decade of depressed interest rates, low-yielding bonds and increasing liabilities, insurers around the world have sought solace in their asset management arms, setting their sights on an investment strategy that is fast becoming a perfect match: alternative investments.
Having grown rapidly in the last decade, the popularity of alternative investments is expected to continue to rise. Preqin estimates that half of all investors committed to private equity, hedge funds or real estate now allocate a minimum 10% or more of total assets.
As with any investment category, the challenge for insurers where alternatives are concerned is to achieve a finely tuned balance among satisfying investor transparency, remaining cost-effective, reaping the highest returns and minimizing operational risk. The reality, however, is very different.
In a WBR Insights report surveying 100 North American buy-side heads of operations, alternative investments were among the most costly and challenging asset classes to manage (62%).The findings mirrored those in a similar report conducted in Europe (51%). A large part of the associated cost is related to outdated technology, as well as third-party outsourcing, which many insurance firms currently use. The expense can be easily avoided with the use of a multiasset-class approach deployed in-house.
These findings are particularly worrying, considering they impact the ability to retain and attract new clients amid the allure of cheaper passive investment vehicles. To address the challenge,insurers should keep in mind three operational concerns if they are to fully reap the rewards of alternative investments.