Building Confidence to Make Assets Pay

By: Phil Davison

06/11/2019

Caution, caution and more caution have been the watchwords of insurance company investment departments over the last decade

It is easy to see why.

Hard on the heels of the Global Financial Crisis came wave after wave of new regulation, with Solvency II at the centre. Which brings strict new regimes of matching adjustments and capital charges to the already delicate tasks of asset-liability management (ALM). With the era of low interest rates and unconventional central bank intervention now looking to stretch into a second decade, insurance company boards are starting to ask how they can produce a better return from all their capital.

Against this background, the excessive caution of static strategic asset allocation, narrowly focussed on maximising yield, no longer seems appropriate. Long-term insurers have started to explore a wider range of alternative assets such as private credit and infrastructure but general insurers still seem hidebound by caution. They worry about the liquidity of some of the new asset classes, fearing that they will not be able to pay catastrophe claims when they hit the portfolio.

But boards are also watching underwriting margins being squeezed and so are looking to their investments to help support the balance sheet and boost profitability. They are starting to question the risk-adverse approach of their investment departments. This is being felt keenly in the London Market where Lloyd’s determination to weed out unprofitable business and the wider focus on cutting the cost of doing business with London is exposing business models to harsher examination.

Insurers are also finding that their investment portfolios are coming under greater external and political scrutiny, especially as environmental issues gain prominence. The demands from international organisations and influential campaign groups that insurers back away from supporting fossil fuels is having repercussions for investment strategies. Some major insurance groups are already disinvesting from coal but where do they put that money and how can they invest in renewable energy without jeopardising liquidity and returns?

Just some of the many questions general insurance chief investment officers (CIO) find themselves being confronted with.

As these pressures mount there is some welcome news as regulators have been reviewing and relaxing some of the penal capital charges. This should open up new opportunities for diversifying portfolios. Many asset managers have worked hard to come up with creative strategies, blending familiar asset classes with new opportunities but all too often find the willingness of life insurers to explore them is not matched by their general insurance colleagues.

The challenge is obvious: what do CIOs and investment managers in general insurers need to help them shake off the excessive caution and risk-adverse strategies that no longer seem an appropriate response to the pressures they are under?

Many will say it is lack of expertise, others will cite lack of understanding among investment committees and blockages in their internal processes. Understanding these concerns and how to address them will be crucial if asset managers are going to build a productive dialogue with general insurers. It is fairly clear that that engagement is not delivering for anybody at the moment

At the heart of this challenge is the need to build confidence that diversified investment portfolios can deliver.

In early 2020, Research in Finance is teaming up with sister company, Research in Insurance to launch The UK Insurance Investment Study.
This project will provide a deeper understanding of the investment strategies within the asset side of UK general insurance companies. How asset managers can effectively communicate, influence and engage with this audience.

There is an opportunity for a limited number of stakeholders to be involved and help shape this influential study. If you are interested, please contact Richard Ley or Phil Davison.