An afternoon with the Insurers
Insurers’ attitudes to risk have changed over the past 12 months. There is evidence of a greater appetite for private capital and other riskier investments as insurance firms start to focus on achieving higher returns. Yet they remain acutely aware of one risk in particular: liquidity.
The Lens Blog picked up on this feeling from a CAMRADATA insurance roundtable held last week where representatives from the insurance and asset management world discussed balancing investment returns with risks.
Some insurers were concerned that although liquidity does exist in desirable assets, they fear a liquidity squeeze at the point of exit.
This is a conundrum for investors of every stripe, of course, and we might quip that futures offer some kind of insurance policy. But roundtable participants suggested what they thought would be some of the most suitable assets or strategies for insurers:
- The financial sector. This was described by one roundtable participant as a “sweet spot” for insurers due to the relationship between yield and duration, and the fact that earnings are said to be easier to predict compared to other industries.
- Credit – albeit in some incredibly risky “hiding places”.
- One asset manager argued for absolute return fixed income. Although some differences occur with interpreting what ‘absolute return’ means, bonds could in this category could be the most risk-efficient type of investment for insurers.
- Participants also reflected the growing interest in private debt.
A general point was made that European corporate balance sheets were currently more robust than those in the US, where the longest bull market in history is taking place.
In addition, whilst it was commented that the insurance industry is keen to start investing responsibly and sustainably by incorporating ESG factors into their strategies, actual change will only come through either regulation, governance or pressure from individuals, partly because responsible investment remains an area subject to so much subjectivity.
To The Lens, the roundtable reflected an industry emerging from a highly complex and disruptive period in its history when it had to cope with Solvency II regulations that limited the investment scope. There is a new phase now where the industry – although wearing liquidity risk like a scar – is ready to put its capital to wider use again.