As returns on sovereign bonds sink to their lowest, opportunities proliferate for managers to do business for the general accounts of insurance companies.

Cerulli's Associates' inaugural European Insurance Industry 2014: Allocators in a State of Flux report finds that low interest rates and high guarantees on traditional insurance contracts are pushing European insurance companies to diversify their investment portfolios away from core fixed-income strategies. However, insurers' investment appetite is limited by the strong regulatory environment under Solvency II.

Diversification is likely to happen within the fixed-income pocket-high yield, credit, infrastructure debt. Insurers will need external managers with the right investment expertise as well as a strong understanding of the insurance world to have access to these strategies.

"Being an expert in European credit is simply not enough," said David Walker, associate director at Cerulli. "Asset managers need to show insurers they know their business model inside out. Having a team dedicated to the insurance business greatly helps in achieving this kind of credibility in front of the client."

A total of 75% of managers based in Europe agree that insurers are outsourcing more of their assets. Competition in the space is intense.

Insurer-affiliated managers have an advantage owing to their insurance background for managing their parent group assets. However, it is difficult for them to win business from other insurers because of the perceived conflict of interest.

"Even the strong captive French and Italian markets are slowly opening up to third-party managers. Insurance companies increasingly want to be seen as independent by their board and their clients. They are also realizing that, by sticking with their captive, they might miss out on some investment opportunities. This is where third-party managers can strike," said Sabrina Lacampagne, an analyst at Cerulli and the main author of the report. 

The research also discusses which markets are the most addressable to third-party asset managers, and how insurers are selecting their managers.

Managers need to target these clients with an investment solution that encompasses local regulatory, tax, and accounting restrictions, and is also adapted to each insurer's specific balance sheet situation.