David Worsfold
One of the key features of every Insurance Investment Exchange event is the opportunity for the participants to anonymously express their views on a range of topics.
The honesty that comes through in the responses can often be as illuminating as the presentations and discussions. That was once again the case at the most recent seminar in London on 3 March, entitled ‘Stability and Instability: navigating today’s complex insurance landscape’.
With all insurers searching for that fractional advantage in terms of increased returns on their portfolios yet without lurching too far or too hastily towards untried or more volatile asset classes, it is no longer a lack of understanding that is the biggest restraint but regulation. It casts a long shadow, according to the seminar participants.
Asked to name the main barrier for insurers to investing in new investment opportunities, almost half came back with the answer that it was regulatory capital treatment and/or uncertainty that held them back. 
Put that alongside the answers to the greatest systemic risk seen in the insurance sector today, and the powerful influence of the new risk matching regime under Solvency II becomes strikingly apparent. Over a third of participants identified procyclicality and herding behaviors caused by Solvency II as the biggest risk.
An even more worrying picture emerges when you consider some of the other responses. About a quarter each opted to put the hunt for yield or the reduction in liquidity as the biggest risks the insurance sector faces.
Put those together and you have the potential for one spectacular car crash.
Imagine the scenario. Yields fall in a widely held asset class, everyone decides to jump the same way at the same time – as they did in the flight from equities in 2005 and again from structured credit in 2007 – but liquidity, already tight, dries up. It would be a painful, precarious moment for the industry, the markets and regulators.
Within the constraints imposed by Solvency II, however, most insurers are still cautiously searching for new approaches to what they believe is their greatest single challenge: lower rates for far longer.
Sentiment has moved away from an expectation of higher interest rates during 2016 with almost all insurers and their chosen investment managers no longer expecting central banks to guide them to a world of higher returns. They know they are going to have to roll their sleeves up and go out looking for it. When they do, it seems illiquid assets such as private debt and infrastructure will be at the top of many shopping lists. 
That doesn’t mean, however, we should expect to see a major realignment of insurers’ portfolios in the immediate future. Caution and conservatism remain the watchwords of most with well over half saying their current approach is best summed up as ‘Strategic – buy and hold with some rebalancing’.
Put that rebalancing in the context of a more volatile investment environment – one of the key themes to emerge during the panel discussions at the seminar – and the search for absolute return strategies starts to loom large, as seen both above and below.
The final question for the audience asks them what they would like to hear about at future Insurance Investment Exchange events? The answer - new approaches to portfolio and construction, along with more innovative investment ideas.
The next seminar on 8 June will attempt to meet that challenge, gathering together cutting edge expert views to look at ‘Boldly going where no insurer has gone before: new approaches to asset allocation”.