Since 2000, equity returns have been dismal and volatility has climbed to its highest level since the 1987 market crash, Swiss Re noted.

The collapse of Enron, Kmart and WorldCom, the company added, has undermined confidence in corporate bonds, while government bond yields are low and offer little refuge.

Insurers, who are seeking to stabilize and bolster returns, are turning to outside experts to review and manage their investments, Swiss Re found.

Currently, Swiss Re reported, U.S. insurers employ third-party managers to oversee $300 billion of investments. European insurers have outsourced about $140 billion of assets to the TPAM market, which is less established than in the United States, the reinsurer said.

Competitive pressure, rating agency scrutiny, and demand for improved risk management and accounting services have given rise to the insurance TPAM market, with 10 providers each managing at least $10 billion of insurance assets and another 11 each managing at least $5 billion, according to the carrier.

TPAM fees, Swiss Re said, are kept relatively low by competing banks, insurers, and asset management firms. For fixed income mandates of $100 million or more, managers typically charge 15-20 basis points (hundredths of a percent), while for active equity mandates of this size, fees are typically 30-35 basis points, Swiss Re reported.

The company found that in recent years, large insurers have increased their asset allocations to alternative investments such as hedge funds and private equity. Swiss Re said hedge funds have the potential to earn solid returns--in some cases at low risk. Swiss Re estimated worldwide insurer holding of hedge funds at $10-to-15 billion.

Private equity, which involves investing in companies whose shares are not publicly traded, Swiss Re said, runs the gamut from start-ups to mature companies being bought out.

Despite current setbacks, private equity has historically earned higher returns than the stock market, although at greater risk. The "sigma" report estimates that European and American insurers hold $25-to-35 billion in private equity investments. All told, insurers' alternative investment holdings are poised to grow by more than 10 percent a year over the next several years, Swiss Re said.

The reinsurer added that market pressures are pushing insurers to place new emphasis on their asset management operations.

Investment risk management--an area in which some insurance third-party managers excel, according to Swiss Re--will become more of a priority for top management, the carrier said.

In this environment, Swiss Re said, superior asset managers will have the opportunity--and the need--to distinguish themselves and prove their worth to clients.