The FCA Assest Management Market Study

28 September 2017

In June 2017, the Financial Conduct Authority (FCA) published its final report on the Asset Management Market Study. We have previously reviewed the main findings of the report and here we look at the practical implications for insurance buyers in the asset management sector.

PRESENT MARKET CONDITIONS FOR ASSET MANAGERS 

Buyers of insurance are likely to be aware of the ‘soft’ nature of the London insurance market for asset managers that have been prevalent for a number of years, driven by the following factors: 

  • Increased number of insurers participating in the financial institutions market 
  • Desire of insurers who historically focussed on ‘big banks’ to diversify their portfolio following the financial crisis, and asset management has been an area of choice for many 
  • Relatively benign claims environment 
  • Number of potential clients available to insurers. 

While the market is still competitive for asset managers, in particular those with AUM of under GBP 2 billion, the significant premium reductions that have been available over the last few years are beginning to drop away as insurers believe they are near to, or even at, the minimum rates they can charge to provide the breadth of cover afforded. Recently we have seen a major Lloyd’s syndicate remove their capacity from the market. While in isolation this has not affected the competitive nature of the market as excessive capacity is still available, however it highlights insurers awareness of current rates and the long term viability versus loss ratios.

While insurers each have their own appetite and views on the potential exposures different managers bring, generically they factor in the following areas when quoting:

Higher risk 

  • Fund of funds 
  • Illiquid strategy 
  • Predominant retail investor base 
  • Negative net flows for consecutive months / quarters / years (depends upon asset under management (AUM)) 
  • Need to close redemption gates 
  • Performance below benchmark. 

Lower risk 

  • Long equity 
  • Liquid strategy 
  • Predominant institutional investor base 
  • Positive new flows for consecutive months / quarters / years (depends upon AUM) 
  • Performance exceeding benchmark 
  • Recognised service providers utilised (administrator, custodian, prime broker). 

FCA ASSET MANAGEMENT MARKET STUDY – WILL THIS IMPACT THE INSURANCE MARKET? 

The report found that the industry displayed evidence of “sustained, high profits over a number of years”. This referenced the level of fees (including performance fees) taken, and how performance was measured; are the benchmarks used fair to investors? It also found that asset managers do not typically compete on price for retail active asset management services, nor is the pricing of segregated mandates equivalent for retail funds versus institutional funds.

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For further information please contact Matthew Hughes, Partner on +44 (0)207 309 8324 or email matthew_hughes@jltgroup.com