New Normal brings New Challenges

Leading insurers, thought leaders and asset managers will gather next week to explore the investment environment for insurers as the major economies gradually emerge from the stormy waters of the pandemic into a new normal.

The big questions are what does that new normal look like and what challenges will it hold, writes Contributing Editor David Worsfold.

Quo Vadis: Inflation, Out of Cash and Becoming Climate Aware is the title of the latest Insurance Investment Exchange virtual seminar, to be held over two mornings next week on 16 and 17 June.

IIE founder and event host Dr Bob Swarup, set the scene for the presentations and panel sessions.

“More than a year on since the pandemic began, there is a little light at the end of the tunnel now. But as countries prepare for a return to normalisation and economies bounce back, there are new challenges on the horizon.
“Uncertainty still remains as to the return of societal business as usual and the cost – both to economies and to societies globally – continues to mount. Where reopening has occurred, it has brought new concerns about inflation and economic fragility.
“For insurers, these tail risks are accentuated by a continued suppression of real yields in the face of ongoing stimulus and a clear indication from central banks that rates will remain low, as they prioritise support. Cash is plentiful - too much so - while returns are limited for all investors, creating a crush for yield.”

Central banks have pumped billions into distressed economies to mitigate the worst impacts of the pandemic on businesses and individuals and they will play a key role as economies and financial systems navigate to the new normal.

How this will play out will be explored in the opening presentation by Frank Eich, former Senior Advisor to the Bank of England. The challenge facing central banks is multi-faceted, he says: “They will be balancing supporting recovery against inflationary pressures while governments try to consolidate public finances”.

Macro-economic pressures and the shorter- and longer-term effects of pandemic could prioritise a need to revisit supply chains, says Eich.

The other issue that will weave its way through the seminar sessions is environmental, social and governance (ESG), no longer a side issue or a neat label for a new strategy but central to the investment climate insurers are now facing, says Eich.

“ESG is here to stay and will need to become mainstream. What this means for societies and economies is not fully understood or appreciated yet. It will require painful changes. Are we ready for them?”

Participants can expect some lively discussion when Frank Eich is joined on the first day panel by David Page, Head of Macro Research, AXA Investment Managers, and Erik Vynckier, Chair, Research and Thought Leadership at the Institute and Faculty of Actuaries.

Commentators and analysts are increasingly focussing on the inflation risk but Page paints a more nuanced picture.

"This is a difficult time for inflation forecasting central banks. A consensus view of transitory inflation will be tested by an uncertain adjustment in inflation expectations – particularly for the Federal Reserve, which has encouraged a shift in inflation expectations with an alteration of its inflation mandate. But if broadly transitory, challenges of disinflationary pressure remain for some – particularly the ECB and BoJ. Moreover, every central bank faces the unenviable task of differentiating between supply and demand shocks after this most unprecedented of economic shocks. This is exacerbated in the UK where Brexit adds to the negative supply shock."

ESG lettersInflation risk is also entagled with government respnses to climate change, says Page: "Challenges remain ahead and the detail of those challenges will start to impact he macroeconomic picture via investment spending boosting growth, or the risk of carbon-priced inflation. Broader areas of ESG have been cast in shadow, although we believe that the economic impacts of other ESG aspects – particularly inequality – have had a material economic impact over the past decade and continue to require attention."

Vynckier strikes a sceptical note when it comes to climate change:

“The response to the conviction that the environment is collapsing all around us (although the evidence points to the opposite trend, with agricultural footprint receding as modern agriculture achieves high yields everywhere), is so incompetent that it is leading to a massive negative productivity shock”.

He will argue that the focus on renewables, such as wind and solar, as replacements for fossil fuels is misguided, with nuclear energy and hydro power more reliable bets.

Asset managers can expect to be challenged by him as they strive to produce ESG data and ratings: “Decisions require decades of expertise gained from engineering and science education and research, honed by on-the-job practice and field experience, which the financial sector simply does not have on offer. ESG ratings will be inferior even to credit ratings, which worked surprisingly badly over the credit crunch, and are further from the core competence of the financial sector to begin with”.

This challenge will be taken up by Lionel Pernias, Head of Buy and Maintain Credit, AXA Investment Managers who will close the first morning with a presentation entitled “Why and how to build a climate-aware insurance fixed income portfolio”.

The second morning will see the results of the recent IIE Business Practices Survey which explored ESG integration in the asset management space and insurer strategies, unveiled by Bob Swarup.

The seminar will then switch its focus to the long-standing challenges of operating in a low yield environment with David Parsons, Director, Fixed Income at M&G Investments, presenting on” Out of Cash - Making the Insurance Balance Sheet work harder”, before David Devlin, Senior Manager - Investment Office for Scottish Widows, and Russell Lee, Global Head of Insurance Solutions at M&G Investments, round up the seminar with a panel on “Old Challenges, New Opportunities - Insurance Asset Allocation in a Much Lower for Much Longer World”.

Throughout the event there will ample opportunity for participants to question the speakers and panellists and to take part in the polls that are a popular feature of all IIE events.

The two sessions will both run from 10am to 12 noon.

Full programme and registration details