Asset Pooling for Insurers – Time for Asia to jump in?

The concept of asset pooling is not new; in fact, it has been around for a number of years.¹ Asset owners and managers have been using this model on traditional fund structures to reduce costs and minimise risk in their portfolio structures. The insurance industry has recently discovered the benefits of asset pooling, moving tens of billions of dollars into newly pooled structures². The use of pooled funds can help an insurer cut investment complexity and improve performance. Whilst this trend has been largely contained to Europe, there are early signs that some Asian based insurers are looking at how pooling their investments and investment management activities would benefit their particular business³. As the insurance market in Asia continues to grow, so does the drive for more streamlined, efficient fund solutions that support distribution, size, and performance. Asset pooling will likely play a big role in supporting these aspirations.

The material challenges facing insurers resonate across the globe, and can be felt by the majority of organisations. Global headwinds include, but are not limited to, the following:

1. Cost Pressures – pressure to reduce costs and create better cost transparency
2. Investment Management – a need to improve returns and access best-in-class asset managers
3. Governance – a focus on reducing complexity and improving governance of the company and assets
4. Evolving business – a drive for ways to enter new markets, acquire and integrate similar businesses and create new product offerings, whilst complying with changing regulations

Navigating one, let alone a number of these challenges, can seem an impossible task.

With the introduction of a new tax transparent fund collective investment vehicle in the UK, the Authorised Contractual Scheme (ACS), significant opportunities were triggered for UK insurers. Previously restricted from adopting asset pooling on a major basis, the insurance industry now had a fund vehicle that was suitable for pooling the majority of assets across their business into one place in an efficient and effective manner.

The approach is simple. One single pooled fund is created by holding investment assets of different life company products and legal entities across an insurer. Rather than multiple entities and products purchasing the same assets, e.g. US securities, there is a “building block” that will purchase the assets. Every product within the insurer can then access that particular asset class through investment in the specific building block.

The building blocks themselves are sub-funds within the pooled fund umbrella, and asset managers are appointed onto each sub-fund to manage these asset classes. Previously, an insurer’s smaller locations or products may have struggled to attract best- in- class asset managers, and therefore settled for managers or strategies that were not optimal for their investment needs. The pooled fund enables the insurer for every site and book of business access to the best asset managers for each asset class through investment into the building blocks.

By establishing such pooled investment structures, the insurers are able to counteract the global challenges they are facing:

Cost pressure – by creating large, single asset pools, the insurer can benefit from economies of scale which include reduced tiered rates for services such as Investment Management, Custody, Fund Accounting, etc. Utilising the same fund administrator, custodian and transfer agency services across the newly formed asset pool vehicle, the insurer harmonises services and provides economies of scale via system integration and operations.

Investment Management – not only does the pooled structure provide access to best- in- class asset managers for all parts of the insurer’s business, it also eases the assessment of investment performance against industry benchmarks, helping the insurer focus on performance and potentially generate greater returns from assets under management.

Governance – the simplified investment structure makes investment governance easier, creating transparency and a better understanding of asset exposure across the business.

Evolving business – as the insurer’s business grows, whether it starts operations in a new country or acquires another book of business, it can be integrated into the pooled fund model, enabling the insurer to more efficiently manage their portfolios. Seeking exposure to new asset classes, such as alternatives, can now be done across the entire business, benefitting from economies of scale rather than small pots of expensive investments.

The sheer volume of assets flowing into these pooled structures from insurers indicates that the potential of this model is not only understood in theory, but is also being implemented in the market.⁴

Whilst the benefits are clear, Asian insurers haven’t yet embraced asset pooling as much as their European counterparts⁵. Some firms have explored options, and found that the use of asset pooling in certain instances could bring benefits. However, many firms have focused their attention on regulatory changes, such as the introduction of the Risk Based Capital (RBC) regimes and the introduction of new accounting standards IFRS9 and 17.⁶

Those that have already dipped their toes in the water have started to reap the benefits including:

• Creating benefits of scale through single asset pools serving the Asia Pacific region, giving smaller sites in growing markets access to the same assets as their larger life companies in Hong Kong and/or Singapore
• Facilitating access to newer asset classes, such as private assets, which may be sub-scale investments from single sites/life companies, but as pooled amount give the increased performance
• Managing RBC requirements through easily investing in and out of asset classes via the subscription or redemption from the building blocks.
• Improving investment performance through centralised investment management functions for the region with best in class asset managers selected for each individual asset class.
• Consolidation of several different books of business, or integration of newly purchased books of business into existing structures.

Asset pooling is not without its challenges. Projects to establish such structures are long and complex, requiring a wide range of expertise. Local investment restrictions, unintended tax consequences and lack of internal know-how all can be inhibiters to such initiatives. The domiciliation and entity type of the pooled vehicle can cause further deliberation and may require a deeper analysis than more simple structures would. Some may prefer the cross-border distribution power of UCITS regulated funds in Europe, whilst others may wish to use local fund hubs such as Singapore or Hong Kong. Finding an administrator and custodian that can support both the needs of a pooled fund and the insurer can also be daunting, with few in the market place experienced enough to provide an end-to-end solution.

The answers are often not simple and exact considerations will always depend on the specific facts and circumstances of the insurer and the desired outcome. Starting small may be a great way to test the water while adopting a phased approach to expansion of size and scale. Experience has shown that with careful planning and experienced partners and providers, these challenges can be overcome.

It is too early to say, if asset pooling will be as widely adopted by Asian Insurers as it has been in Europe. However, for those Insurers that are eager and willing to jump into this new model, it may open up a wide range of benefits and opportunities from a global perspective.