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Data clarity and transparency key for purposeful insurance investment

By: Jack Dominy


As markets in the UK and across the world continue to come to terms with the impact of Covid-19, the general insurance industry is certainly no exception.

With both assets and liabilities negatively affected for several insurers, chief investment officers (CIOs) are no doubt trying to understand just what their appetite for risk is, for the rest of 2020, but also beyond.

Interest rates have bottomed out – and have been persistently low for some time. Lowering bond investment yields have started to hit return levels among general insurers, with Hiscox stating that yields are now at the lowest level seen in the firm’s history. Looking forward, there looks to be no foreseeable change to this across the market, giving rise to the idea that insurers will need to look towards more esoteric and previously untried asset classes in order to hunt for return on investment.

Expansion into private assets could well be the opportunity that CIOs at non-life insurers have their eye on, due to the potential returns and liquidity premium. Looking for different risk niches will surely only become more prevalent, particularly as investment portfolios become increasingly important for insurers to provide returns in a sluggish economy. This is in addition to those insurers all typically going after the same types of risk in previous years, and therefore finding a differential is necessary to grasp some form of meaningful return.

This is a view held by J.P. Morgan in their assessment of the impact of market volatility on European non-life insurers: “Outside of fixed income, insurers are considering where there may be good entry points into risk assets across developed and emerging equity markets, as well as in more specialised alternative investments designed to seek out opportunities in a stressed market environment.”

Whilst this highlights the appeal of alternative assets to fixed income, it also showcases the potential of alternative markets outside of the UK. Emerging markets have been built into equity portfolios within pension investments for some time, so this could well be the time for general insurers to add such funds to their portfolios. This is particularly prevalent in the current climate with growth in several sectors across developed markets hard to pin down, as well as the Brexit cloud of uncertainty which still looms over the UK economy.

But perhaps the largest cloud to accurate judgment that hinders the progress of sound investment within insurers is the lack of transparency around data.

How to make decisions and use the data you have available to your advantage as an insurer is typically something which has been relevant to the underwriting side of non-life companies. Indeed, topics such as technology and big data are becoming vital in the insurance market, as companies adapt to artificial intelligence and processing real time information, in order to build better processes and more efficient policies.

Yet data flow and building a data efficient model on the investment side of the business is set to be just as crucial. As CIOs look to more esoteric assets and investments, they will require more data on those assets, and that data to be of high quality and clarity, to try to ascertain what the balance between risk, return and liquidity is, and what that means for their portfolio.

More transparency is needed into the performance and benchmarking of ESG funds, in the insurance investment market, but also for institutional and retail investors. For insurers, there is arguably a much broader need for data transparency. Shining a light on asset classes which have until now largely been kept in the dark in the insurance investment space will allow portfolios to grow in the wake of Covid-19, but also to flesh out investment strategy for the future to achieve consistent, solid returns.

Research in Finance has teamed up with sister company, Research in Insurance to launch The UK Insurance Investment Study (UKIIS). This project is aiming to provide a deeper understanding of the investment strategies and challenges within the asset side of UK general insurance companies. The study will look to unpick how asset managers can effectively communicate, influence and engage with this audience. The project is a qualitative study, interviewing a number of CIOs and Senior ALMs throughout the non-life insurance industry.

If you would like to be become a partner in the research or take part in one of the discussions, please contact Richard Ley or Phil Davison.

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