Insurers, when they decide to outsource the job of investment manager to a third party, rely less on a structured selection process and more on their trust and comfort level with the outsource operation, a new survey states.
David Holmes, partner at strategic consultant Eager, Davis & Holmes, who conducted the survey, said insurers generally do not score prospective third-party investment managers on predefined criteria; do not use a manager evaluation database to evaluate prospective investment managers; and do not use a third-party consultant to evaluate investment managers' products and organizational stability and depth.
Speaking to NU Online, Mr. Holmes said it is important for insurers to get "under the hood" and gain a good understanding of the philosophy, process and experience prospective investment managers have in managing insurance portfolios.
In a statement, Mr. Holmes said the survey also touched on future outsourcing intentions and found most insurance companies intend to continue outsourcing at the same level or expand use of third-party investment managers. "We are using caution with these results," he said. "The survey was conducted in August and September of 2008, on the cusp of unprecedented events in the financial markets. Outsourcing in 2009 will be influenced by changes in target allocations, rebalancing and perhaps manager terminations."
Insurers' "reliance upon qualitative selection criteria is understandable given the nature of insurance portfolios. Still, insurance companies might benefit in borrowing somewhat from the selection process used by other institutional investors," said Mr. Holmes.
Insurers, he noted, could benefit from a more structured selection process. He described this as insurers going through a more formal process where they think about what they want to accomplish and think about what criteria should be used to choose one third-party investment manager over another.
Mr. Holmes added that the qualitative criteria many insurers currently use are not necessarily bad. He said insurers should want to end up with someone they trust and have comfort with. But he said insurers should look to combine the qualitative criteria with quantitative criteria when choosing a third-party investment manager.
The survey was conducted through the Insurance Asset Outsourcing Exchange, Mr. Holmes said. The Exchange was founded by Eager, Davis & Holmes "to promote knowledge about third-party insurance asset management and serves insurance companies, investment managers and investment consultants."
The survey was completed by 107 U.S.-based insurance companies or company groups that currently outsource to third-party investment managers, according to Mr. Holmes.
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