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Into the Unknown

By: Jack Dominy


The curse of uncertainty must seem like the mythical head of Hydra for the investment managers of non-life insurers.

No sooner do they cut off one ugly head – one source of volatility and uncertainty – than a dozen more appear in its place.

Some of these they will have seen before, although they might seem larger and more intimidating now. Lower for longer – or ever – interest rates, strains on liquidity and inflexible regulation are familiar challenges. But new ones are looming over CIOs and investment managers all the time as the second wave of the Covid-19 pandemic gathers sinister momentum and as USA lurches towards its most bitterly contested Presidential election ever.

A hard market. A genuine hard market, not a short-lived blip such as we saw in early 2019. This is something that will be new to a generation of investment managers in the non-life sector and their teams. A sustained hard market has not been seen since the turn of the century two decades ago. What does it mean for investment strategies and portfolio construction? Will higher premiums really mean improved underwriting profits and thus less pressure to boost investment returns?

These are just some of the key questions emerging from the latest in-depth study, the UK Insurance Investment Study (UKIIS), carried out by Research in Insurance. This research has focussed principally on the non-life sector and clearly flags up key concerns in the market.

Sometimes asset managers trying to build relationships with non-life insurers or insurance groups with large non-life businesses play down some of their concerns, especially when they differ from those with the much larger life and pensions investment funds to manage.

No-one with a real understanding of this sector will be surprised that liquidity remains the number one concern. This is a deal breaker for many when selecting the assets that form the backbone of their portfolios. Without it, no general insurance company can be certain that it will be able to pay to claims. With the fallout from the Covid-19 pandemic impacting commercial and retail property values and alternative assets that were creeping into portfolios, such as student accommodation, liquidity remains in sharp focus as the primary concern. The promise of better yields alone is not enough to tempt non-life insurers into a bolder take-up of alternative assets.

Many are pinning hopes on more transparent and better integrated data to help them navigate a course through the current unpredictable market conditions. This could, they hope, bring clarity to both sides of the balance sheet. Too often underwriting and investment have existed in sharply delineated silos, neither fully understanding the other. Maybe genuinely integrated data will end that divide.

Complaints about regulation are nothing new but they seem to have a sharper edge now.

Armed with better data and sophisticated models, investment managers feel more than ever that they should be liberated from some of the regulatory constraints. Pressure to look more favourably on infrastructure investments and assets with strong ESG indicators is growing all the time, especially with governments around the world talking about an investment-led ‘green recovery’ from the economic ravages of Covid-19. Easing the capital requirements and simplifying the approval processes is a constant refrain, together with a plea to clarify definitions around green assets to help avoid the trap of greenwashing.

Brexit may bring some relief on the regulatory front, according to Rishi Sunak, Chancellor of the Exchequer.

“The Government also plans to bring forward a review of certain features of Solvency II to ensure that it is properly tailored to take account of the structural features of the UK insurance sector. The review will consider areas that have been the subject of long-standing discussion while the UK was a Member State, some of which may also form part of the EU’s intended review. These will include, but are not limited to, the risk margin, the matching adjustment, the operation of internal models and reporting requirements for insurers”, said Sunak in a written statement to the House of Commons during the summer.

The Treasury is promising a consultation paper within weeks. Whether it brings relief on the issues holding back refreshed investment strategies remains to be seen.

There is a sense from this research that non-life CIOs are saying “give us the tools and we will get on with the job”. Perhaps they will get their wish and slay that many-headed Hydra.

The UK Insurance Investment Study (UKIIS) is a research study led by Research in Insurance, with fieldwork conducted in the latter part of summer 2020. The project provides a deeper understanding of the investment strategies and challenges within the asset side of UK general insurance companies. The project is a qualitative study, interviewing a number of CIOs and Senior ALMs throughout the non-life insurance industry with the aim of looking to unpick how asset managers can effectively communicate, influence and engage with this audience.

There are two options available to asset managers interested in this study:

Option 1: 30-minute video-recorded presentation sent via email, plus full report

Option 2: 75-minute live presentation including Q&A, plus full report

Please contact Phil Davison or Richard Ley to find out about costs, or if you have any questions.

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