There is some truth to this. The Equitable Life debacle in the UK and other similar stories in continental Europe have been linked to inappropriate sales which raised customer expectations. Assets have also been allocated in a short-sighted manner across the industry.
 “Life companies have had problems in asset management for a long time. They have used some very peculiar and inappropriate investment instruments, and they have ignored the importance of asset liability matching,” says one prominent consultant.
 “Five years ago, I couldn’t say this to them without getting my head bitten off. Now they all seem to accept these criticisms and have started to do something about them.”
 Some asset managers have been quicker than others in discovering and making sense of this market. That does not mean to say life insurers are all prepared to outsource assets to third parties. If they did, this would be a damning inditement of the asset management subsidiaries most of them have been keen to establish in recent years. Witness the “independent” asset management units set up by lifers including Aegon, Standard Life and Aviva.
 But today, they are starting to listen to external influences. Across the UK and even in continental Europe, where there was once a policy of preventing the smallest scrap of business ending up with a possible or actual competitor, external mandates are becoming more common.
 A recent industry landmark was the decision by Abbey, owner of the Scottish Mutual and Scottish Provident life offices, to outsource £20bn (€29bn) in client assets last year. The transition management mandate for the entire portfolio was handled by State Street Global Advisors, with SSgA expected to hang onto £12bn for the long term in passive, enhanced and liability matching strategies. The rest is gradually being farmed out to fund managers including Axa, BGI and JPMorgan Fleming.
 This externalisation is not an abdication of responsibility, says James Bevan, Abbey’s outspoken chief investment officer, as the life companies still maintain control of asset allocation, manager selection and monitoring correlations between various mandates.
 “Asset allocation is critically important in setting investment objectives. If we outsource this function, we are getting too close to the regulatory, fiduciary and legal obligations of the life company,” believes Mr Bevan. “If you delegate these, then you need to consider selling the business, as it is a bridge too far.”
 Over the last five years, smaller life players, such as GE Life, Lincoln and Liverpool Victoria outsourced to external managers. But whatever the big asset managers claim, their experience has not been an entirely positive one.
 Liverpool Victoria outsourced US, Japanese, Pacific and European equities, but brought the European segment back in-house in 2002, due to performance concerns. This meant hiring a new European equities team, after having previously closed that department.
 Outsourcing, says Liverpool Victoria’s group director Steven Daniels, means small life players can share in the ideas of global asset management groups, and secure access to their strategists and economists. They can also benefit from the “halo effect” which helps life companies distribute products, by using names of top-performing fund players on their literature.
 But there are pitfalls. “You have to give up the ability to influence asset managers if you outsource,” says Mr Daniels. “You can control internal managers, but you have to rely on external managers. If you ask them to adjust from small to mid-cap stocks mid-mandate, as you have changed your view, they will say this is not what you have bought from them.”
 Internal asset managers can also act as monitors, overseeing increasing numbers of investment bankers who are knocking on the doors of life insurers, offering derivative-based solutions.
 It is through the long-term put options, offered by banks such as Deutsche and Goldman since 2003 that life insurers have been able to effectively manage liabilities and correct mistakes made from previous over-allocation to equities and mass offerings of guarantees.
 But there is an under-supply of suitable instruments. And smooth-talking investment bankers often try and sell something which may not be required. Large life offices such as Prudential and Friends Provident use their internal funds arms to weigh up these products. Abbey is also aware of the danger. “Investment banks can behave like substitutes for asset managers,” says Mr Bevan. “They can represent a significant risk to investors.”
 Rick Lacaille, chief investment officer of SSgA, whom Mr Bevan has entrusted to handle his transition to external influences, is also on his guard. “As soon as our deal with Abbey was announced, I received a visit from the most senior person I have ever met from an investment bank,” recalls Mr Lacaille. “They told us that what we were trying to do as a transition manager is impossible, that we should turn to an investment bank.”
 As a passive investment expert, Mr Lacaille is used to just constructing products to follow indices. He is 43, but not surprisingly, looks at least 10 years younger. Now he will have the vast concerns of the life industry on his shoulders.
Yuri Bender, editor-in-chief yuri.bender@ft.com

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