Insurance companies turning to hedge funds, says Swiss Re

Insurance companies are increasingly turning to third-party asset managers to improve returns and manage risk, according to a new study by Swiss Re. As a result of the trend, insurers' alternative investment holdings in hedge funds are poised to grow by more than 10% annually in the coming years.

Hedge funds have the potential to earn solid returns, in some cases at low risk, Swiss Re said, noting that insurers' worldwide holdings of hedge funds are estimated to be anywhere from $10 billion to $15 billion.

“The current investment environment requires insurers to place new emphasis on their asset management operations. Investment risk management - an area at which some insurance third-party managers excel - will become more of a priority for top management. In this environment, superior asset managers will have the opportunity, and the need, to distinguish themselves and prove their worth to clients,” the report said.

At the end of 2001, global insurance assets totalled approximately $11.5 trillion, of which 82% were held by life insurers. Currently, American insurers employ third-party managers to oversee $300 billion of investments. Insurers in Europe outsource about $140 billion of assets, although the region is now likely to outsource its asset management at a faster rate than the US, Swiss Re added.