How Insurers Use ETFs

September 01, 2019

When it comes to institutional investors embracing ETFs, the good news is that insurance companies are using more ETFs in general accounts than they ever have before, and most are looking to increase that allocation in years ahead.

The bad news is that almost 40% of insurers have yet to jump into—or return to—ETFs. A recent Greenwich Associates and State Street Global Advisors survey of 52 insurance companies commanding about $1.9 trillion in combined assets found that 20% of insurers have evaluated or used ETFs at some point in the past, but no longer do. Another 20% of them have never even considered the exchange-traded wrapper.

What still holds back ETF adoption among many institutions is, first, regulation and internal mandates that keep allocations tied to “preferred” vehicles, the survey found. Secondly, many insurers aren’t convinced ETFs are a viable source of alpha, so they still steer clear of them.

Regulation Key For Adoption
But this is an evolving landscape for ETFs. By and large, insurers who have yet to embrace the vehicle say they’re likely to revisit that stance as the regulatory environment changes over time, according to the survey.

ETF-friendly regulation is key to adoption among institutions. And that’s happening. Changes in regulation have recently buoyed ETF usage among insurance companies; specifically, usage of fixed income ETFs.

To insurance companies, the accounting treatment of fixed income ETFs made it difficult for adoption because statement filings were designed for individual bonds, not portfolios of bonds.



“As insurance companies began adopting ETFs more and more, they were finding some inconsistencies as to how fixed income ETFs were being accounted for on the statutory statement filings,” said State Street’s Insurance ETF specialist Chad Nettleship.

“There was a lack of clarity,” he added. “When I’m filling out my statutory statement filings, the cookie-cutter boxes are focused on individual fixed income securities—the pricing of the bonds, based off par as opposed to share price; how am I accounting for these? Am I using fair value? Am I using what they were at cost?”

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