How can Insurers balance investment risk and return?


CAMRADATA, a leading provider of data and analysis for institutional investors, has published a new white paper, ‘Investment Solutions for Insurers – Balancing Risk and Return’ based on its annual insurance roundtable.

The white paper covers investment insights from consultants, investment and asset managers working in insurance from leading companies including TwentyFour Asset Management, Antares Managing Agency Limited, InnovaRe Investment Solutions, RGA, River and Mercantile Solutions and Pool Re.

Discussing their current investment outlook, the insurers’ inhouse investment officers all said they were fairly satisfied with their asset management strategy and out of a scale of 1-5, scored their current situation between 3 and 4.

However, they also discussed challenges and potential risks for insurer that may lay ahead, as well as the value of short-termism and environmental, social and governance (ESG) issues.

Sean Thompson, Managing Director, CAMRADATA said, “Given the generous returns from many asset classes over the last ten years, it’s not surprising insurers feel quite contented with their strategies. But, a major point of discussion was how insurers can model and get comfortable with novel alternatives which could maximise returns to counteract weaker growth in certain economies like the UK, and balance other risks.”


What are the investment challenges for Insurers?

The panel revealed a unique set of challenges for insurers.

One is motor insurance in the UK, where exposure to longer duration liabilities arising from large bodily injury claims, can pose a challenge for asset liability matching for insurers.

Another is Absolute Return strategies. Aymeric Gautier, founder and COO of Innova Re Investment Solutions (IRIS), an investment adviser for a Lloyd’s syndicate highlighted the mixed performance of Absolute Return strategies.

The panel also discussed the categorization and definitions of strategies in investment management. TwentyFour Asset Management has an Absolute Return Credit (ARC) Fund that is long-only, which contravenes some investors definition of Absolute Return.

TwentyFour AM’s ARC Fund is primed for rising rates because its duration is never higher than three and a half years. This can seem counterintuitive as it’s usually expected to be rewarded more if you lend for longer. In terms of efficiency, research from TwentyFour suggested the opposite is true.


Major themes

The panel looked at the value of short-termism with TwentyFour AM’s ARC Fund highlighted as one activity where short-termism seems to pay. So far, the fund has performed strongly, over 11% net of fees since launch in summer 2015.

How to model and get comfortable with novel alternatives and strategies including real estate, private debt, infrastructure and illiquid alternatives are also themes discussed in the white paper.

Environmental, social and governance (ESG) issues were also covered and the consensus from the investors is that change is coming either through the evolution of industry and society or via litigation or regulation.

Sean Thompson concluded, “The panel highlighted some major risks in today’s investment world and not just as ESG begins to flow into mainstream regulation and therefore allocations. Insurers faced record payouts in 2017 in part because of extreme weather, which has continued into 2018.

“But there are also uncertainties surrounding Brexit, increasing populism globally and the tension between the search for yield and staying liquid. Given this uncertainty; insurers need to make sure they are comfortable with their strategy and asset allocations and perhaps explore alternative solutions that may be better suited for these uncertain times.”


To download the full whitepaper, please click here.