Viewed as ‘one size fits all’ solutions, passive strategies haven’t always been popular with insurers. However, innovation has recently opened the door to a new era.
Meeting client needs
Index solutions can now be customised to meet specific needs. Whether you’re looking for pure passive index exposures, tailored sustainable outcomes, or index outperformance in a risk-controlled way, it’s possible to invest in systematic and rules-based solutions across listed equities and fixed-income strategies.
A range of investment building blocks
With £86 billion of assets under management, including £60 billion managed on behalf of UK insurers (1), our Quantitative Index Solutions team offers a range of investment building blocks, including market value indexation, indexation with sustainable criteria, and enhanced indexation.
As managers of index solutions since 2005, we’ve been at the forefront of innovation, from designing customised client mandates, to launching our own proprietary range of indices with sustainable attributes.
How can asset managers help?
Insurers are becoming more aware that it’s possible to design an indexation mandate based on a variety of rules and guidelines.
Considerations for insurer investment portfolios include accounting, regulation, and solvency capital. Sustainability and ESG (environmental, social and governance) reporting are two additional important considerations, and these are at the heart of the innovation process across our index products. To help investors achieve their desired outcomes, we adapt our three approaches to further integrate ESG:
- Through our Indexation offering, we can track third-party ESG indices, apply negative screens at portfolio level, and/or optimise the ESG credentials at the portfolio construction phase.
- Through our Sustainable criteria offering, we partner with index providers to design bespoke indices to meet our clients’ needs and then replicate those indices in our portfolios.
- Through our Enhanced Indexation offering we can incorporate ESG targets as part of portfolio construction while applying our quantitative approach to aim for index outperformance.
We’ve been working closely with several UK insurance clients to design customised mandates and indices.
Case Study - Proprietary indices
In 2020 we launched a range of seven customised equity indices to help investors address their sustainability concerns.
These differ from traditional market-capitalisation indices by excluding companies that undertake specific activities and optimising the remaining universe to target improved sustainable outcomes (higher ESG score, lower carbon intensity, and higher exposure to green revenues).
Both the exclusions and the targeted outcomes aim to improve investors’ long-term returns by managing sustainability risks and benefiting from climate transition activities.
A gap in the market was identified.
The indices stem from our close partnership with a leading UK insurer. Our client was looking for equity indices that target broad sustainable improvements, and a gap in the market was identified. We partnered with MSCI to design a range of customised indices covering World, APAC, Europe, North America, Emerging Markets, UK, and Japan equities. These are exclusively licensed to abrdn.
Our purpose is to retain the core characteristics and benefits of passive investing with improved sustainable outcomes.
These characteristics include a similar risk and return profile to traditional indices, low cost to investors, and diversified exposure, as well as controlled turnover and implementation costs.
The key sustainable improvements integrated into the design include the exclusion of controversial companies and industries with significant sustainability risk, and the enhancement of the parent index ESG scores. Another benefit is the management of climate risks and opportunities through exclusions, portfolio carbon reduction targets and increased exposure to companies with green revenues.
To date, we’ve built six segregated portfolios and launched three pooled funds tracking these indices. The portfolios represent over £38 billion of assets, including £36 billion managed on behalf of UK insurers (1). Our team has been working towards evolving those indices and studying the potential of launching a new range of decarbonisation indices. We’ve also worked with insurance companies on sustainable fixed-income propositions, tailoring solutions to their ESG criteria.
Conclusion
The insurance industry is in a unique position.
In terms of liabilities, it’s massively exposed to climate change. Insurers hold a responsibility to help policyholders recover with the right kind of insurance in place, but they can also help tackle environmental challenges via sustainable investment.
Innovative index solution providers can answer sustainability concerns and create tailor-made portfolios built to meet each client’s specific ESG standards. This enables insurers to reallocate towards cost-efficient passive mandates.
Since the QIS team’s inception in 2005, we’ve evolved our index solutions approach to meet the changing needs of our client base and accompany insurers on their journey towards efficient risk-aware investing.
Insurance Asset Management Awards 2024
Passive Manager of the Year
abrdn Investments won the award for Passive Manager of the Year at the Insurance Asset Management Awards 2024.
This article was prepared for publication in Insurance Asset Management in connection with the award.
Visit our website to find out if we can help you meet your insurance investment goals.
- Source: abrdn Investments as at 31 December 2024