Key Takeaways
- • NEPC argues that insurers face growing investment complexity as portfolios expand beyond traditional investment-grade fixed income and public equities into private markets and specialized credit.
- • Smaller and mid-sized insurers can use an investment consultant to extend internal capabilities, with engagements ranging from advisory services to a full outsourced chief investment officer (OCIO) model.
- • Larger insurers with established teams can engage consultants for targeted expertise on a specific asset class or strategy while retaining responsibility for the rest of the portfolio.
- • Private markets require specialized work on strategy selection, manager evaluation, fees, liquidity terms, capital treatment, pacing plans, and ongoing capital call and distribution monitoring.
- • The paper is a marketing piece from NEPC, an investment consultancy, and it frames the consultant's role as preserving existing governance while adding capacity.
Summary
A white paper from NEPC, an investment consulting firm, examines how insurers can use investment consultants to strengthen oversight of increasingly complex portfolios. According to the paper, insurers face rising volatility in underwriting results, which makes it harder to rely on operating performance to support surplus growth. P&C insurers have had to manage a challenging claims environment amid higher inflation, and health insurers face escalating medical costs. Higher operating costs have raised the importance of investment portfolios as a contributor to overall company results.
The paper notes that insurance portfolios have historically been weighted toward high-quality investment-grade fixed income, with a complementary allocation to public equities sometimes included. NEPC states that this structure may still suit insurers given the importance of liquidity, book yield, capital charges, and downside protection, but that opportunities may exist to diversify into illiquid private markets, niche credit such as private placements and real estate debt, high-yield credit, and tax-managed equities. The firm cautions that portfolio evolution should be deliberate and account for the effect on capital charges and realized gains and losses.
NEPC describes several consulting models. For smaller and mid-sized insurers, a consultant can extend the internal team across the full investment process, including research, performance reporting, and, through an OCIO arrangement, the consultant's full resources. Larger insurers can use consultants for specialized private markets research, as a sounding board, or to bring differentiated ideas, often for a single asset class while retaining the remaining portfolio. Some clients retain discretion over asset allocation and manager selection and use the consultant for implementation, including manager coordination, legal review, and fee negotiations, while others delegate manager selection entirely.
On private markets, the paper says the opportunity set is broad and terminology, fees, liquidity terms, and capital treatment vary widely. A consultant can help define the role of private markets, identify strategies, evaluate managers, build a long-term pacing plan, and monitor capital calls, distributions, performance, and liquidity planning. NEPC describes its relationships as flexible partnerships designed around an insurer's objectives, governance structure, and internal resources, and says that the ultimate responsibility for the investment program remains with the insurer.
The paper notes that insurance portfolios have historically been weighted toward high-quality investment-grade fixed income, with a complementary allocation to public equities sometimes included. NEPC states that this structure may still suit insurers given the importance of liquidity, book yield, capital charges, and downside protection, but that opportunities may exist to diversify into illiquid private markets, niche credit such as private placements and real estate debt, high-yield credit, and tax-managed equities. The firm cautions that portfolio evolution should be deliberate and account for the effect on capital charges and realized gains and losses.
NEPC describes several consulting models. For smaller and mid-sized insurers, a consultant can extend the internal team across the full investment process, including research, performance reporting, and, through an OCIO arrangement, the consultant's full resources. Larger insurers can use consultants for specialized private markets research, as a sounding board, or to bring differentiated ideas, often for a single asset class while retaining the remaining portfolio. Some clients retain discretion over asset allocation and manager selection and use the consultant for implementation, including manager coordination, legal review, and fee negotiations, while others delegate manager selection entirely.
On private markets, the paper says the opportunity set is broad and terminology, fees, liquidity terms, and capital treatment vary widely. A consultant can help define the role of private markets, identify strategies, evaluate managers, build a long-term pacing plan, and monitor capital calls, distributions, performance, and liquidity planning. NEPC describes its relationships as flexible partnerships designed around an insurer's objectives, governance structure, and internal resources, and says that the ultimate responsibility for the investment program remains with the insurer.
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