David Worsfold
There was a noticeable change of mood among the insurance companies who packed the first Insurance Investment Exchange seminar of the autumn on 19th September.
The almost single-minded search for yield that has been so prevalent in the post-financial crash era is giving way to a new willingness to broaden the search for premium assets that can do more than just be squeezed for a fraction of a percent more yield.
For some, the change in mood is being driven by a genuine desire to embrace a more dynamic approach to the assessment of risk, return and capital. For others, it is an acknowledgment that the world of easy money and low interest rates is coming to an end.
Among the consequences of this changing mood is the new prominence being enjoyed by illiquid assets, said Prasun Mathur, head of shareholder investments, UK & Ireland Life for Aviva, in his keynote talk The insurer’s dilemma: real world opportunities and constraints.
He said the big switch after the 2000 dotcom crash from equities to fixed income had run its course and that the search was on for new assets, with the premium to be earned on some illiquid assets proving very tempting. They come at a price, however: “We have to make a call on whether investing in an illiquid asset is worth it, because you can be locking in your wealth for up to 25 years”.
There was also a tension between capital efficiency, which is the post-Solvency II objective of most, and yield, which still dominates the thinking in the boardroom. In some cases, the resolution of this tension is leading to some insurers adopting the nuclear option of moving away from margin-based business almost entirely.
The first panel session explored these tensions and their implications.
Adam McConkey, who specialises in managing smaller company funds at Lombard Odier Investment Managers, said the unease among insurers about the current conventional model was part of a wider unease about where the developed world finds itself ten years after the financial crisis: “We are seeing a real kick back in the real economy and the way people behave, both politically in how people voted for Trump and in the referendum, and we are also seeing it starting to impact corporate behavior”. He had a warning for those finding themselves swept along by this new mood: “People are chasing returns in areas where they don’t have the expertise”.
There are opportunities for improving returns through diversification, said Etienne Rougier, managing director of insurance business development at AB, citing investment grade corporate debt in the US as an example of an asset producing good returns but also offering the liquidity that was still important for many insurers. His concern was that insurers are not often set up to respond to opportunities when they come along: “What we see with insurance companies is that sometimes it is very hard to move quickly. Some have responded to this challenge by taking an unconstrained approach to allocation”.
Independent consultant and general insurance specialist David Osborne said that property and casualty insurers were right to be cautious about assets that looked attractive but could turn illiquid.
“What you need to worry about is illiquidity in stressed circumstances. For instance, in the corporate debt market, if we saw a repeat of 2007/08, it could become illiquid for up to six months”.
This would be very damaging for general insurers: “The recent windstorms have reminded the property/casualty sector that it needs liquidity. In the past, we have seen the P&C companies having to liquidate their entire portfolio to pay the claims. They are not insolvent because they will get money back from reinsurers but they need the cash today to pay the claims”.
Mathur said the long-term market also had a need to preserve liquidity: “Pensions freedom mean that you need to keep a very close eye on the potential liquidity risks”.
The second panel session examined some of the evolving approaches to managing insurance portfolios and the challenges this poses.
A consensus quickly emerged around the difficulties of managing complexity.
Andrew Nicoll, global head of insurance at Columbia Threadneedle Investments, said the need for insurers to have access to a greater depth of resources was made more critical by increasing regulation and asset complexity: “This has stretched some insurers and a number of them have focused on more capital-lite products as a response… there is definitely a role here for asset managers to help them achieve an optimised asset allocation”.
Alex Wharton, director of client solutions at Aviva Investors, agreed that the growing complexity of investment opportunities and asset classes required large teams with a broad knowledge to evaluate them properly.
“This is where the importance of partnerships comes in as it is about an alignment of interests. It is important that they deliver genuine operational value, which can only be achieved if they work together and there is absolute clarity of roles”.
Osborne said complexity was more of a challenge on the general insurance side: “On the life side, there are big companies with deep expertise but on the general side, it is largely made up of smaller companies who don’t have the breadth or depth of resources to cope with the increasingly complex world of investment strategy and asset allocation”. This, warned Osborne, could lead to an overly conservative approach.
The seminar included four in-depth breakout sessions presented by AB, Aviva Investors, Columbia Threadneedle and Lombard Odier.
The audience also had an opportunity to participate in a series of interactive polls. An analysis of the results of those can be found here.
The next Insurance Investment Exchange half-day seminar takes place on Wednesday 29 November, when a range of expert speakers will pass judgment on the year gone by and look forward to the challenges and opportunities for insurance investment portfolios in 2018. Registration is now open here