Increasing Trend of Outsourcing Investment Management Among U.S. Life/Annuity Insurers

The trend of insurers increasingly outsourcing their investment management functions continues to gain momentum, particularly within the U.S. life and annuity (L/A) sector, according to a recent AM Best Special Report. This shift is driven in part by private equity and asset management firms that are investing in these insurers and often taking on asset management responsibilities even when not holding a majority ownership stake. This development reflects a strategic response to the need for expertise and diversification in asset management to maintain competitiveness and adequate investment spread in a complex market environment.

Data from the 2024 National Association of Insurance Commissioners (NAIC) indicates that over 43% of life/health insurers now rely on a single third-party investment manager to actively manage at least 10% of their portfolio, a notable increase from 32% in 2016. Moreover, the proportion of insurers outsourcing more than half of their investment assets to unaffiliated managers has risen steadily to 35.5% from 26.8% in 2016, underscoring the growing reliance on external investment expertise.

The participation of private equity and asset management companies in the L/A insurance space not only brings additional capital but also specialized investment knowledge. Insurers, particularly annuity providers with sizable portfolios, find these partnerships attractive as they offer a steady income stream and access to diversified asset classes that in-house teams might not possess the resources or expertise to handle effectively.

This trend aligns with broader industry movements toward operational efficiency and strategic investment diversification, mitigating risks associated with limited internal investment capabilities. Insurers face challenges related to compliance, regulatory changes, and market volatility, increasing the value of partnering with skilled external managers who can navigate these complexities.

AM Best, a global credit rating agency and analytics provider specializing in insurance, highlights this outsourcing pattern as a significant market development. Insurers' shift to external asset management reflects evolving strategies in asset allocation and capital management aimed at sustaining profitability and responding to changing regulatory and economic conditions.