It used to be simple. When explaining to someone how the investment strategies of life and pensions insurers differed from their general insurance cousins.
It used to be all about how the former invested for the long term, looking for secure growth over decades, while the latter took a short term approach.
It is rather more complex nowadays.
The premiums general insurers collect support short-term contracts and as an across-the-board average one-fifth of those give rise to a claim every year. That means the assets those premiums are invested in have to be capable of being realised very quickly – liquidity is king. However, insurers would still hope for a return on investing those premiums, even for a short period.
Today’s investment managers in the general insurance sector must look back with envy at the easy life of their predecessors. There was a time in the late 1970s and 1980s when it was all about “cash flow underwriting”. Pile in the premiums, get them invested in high interest bearing gilts and fast-growing equities and little could go wrong. Pay out the claims, tie up the books for that year and move on, leaving a very tidy return on investments.
Two things have changed that dramatically.
The first is the new world of permanent low-interest rates, making eking out a return on traditional gilt investments very tough.
The second is the gradual build-up of long-term liabilities in short term books of business. The growth in structured settlements where the costs of settling claims for people with catastrophic injuries have slowly moved from large one-off payments to continuous payments over many years has crept up on motor insurers and employers liability insurers.
Some were already waking up to the fact that a very large part of their claims reserves were spoken for decades to come. For instance, a young person with a severe brain injury as a result of a road accident might require expensive care for several decades and advances in medical science mean that care will be more expensive and required for longer. Changes over the last year in how these should be accounted for have just exacerbated the problem.
There are specialist motor insurers, in particular some of those in the Lloyd’s market, that are said to be looking at over half of their annual claims costs taken up with structured settlements, long-term liabilities sitting on a short term book. This has required investment managers to review their strategies and ask whether the long term, less liquid, assets favoured by those in the life and pensions sector should now have a place in their portfolios.
This requires new expertise and that does not come cheap. As investment returns have come under intense pressure and overall profitability is being squeezed, insurance company boards are not responding favourably to suggestions they need to expand investment teams to deepen their expertise in a wider range of asset classes. If anything, they want better returns for lower costs, not a formula for helping investment teams get to grips with the need to match a much more complex set of liabilities with a more diverse range of assets
Asset managers are trying to fill the gap but they always come with their latest new asset smartly packaged, ready for insurers’ money to flow into. Not surprisingly, a degree of cynicism can be found among CIOs at asset managers’ attempts to fill this knowledge gap.
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.