INSURANCE ASSET MANAGEMENT, EUROPE 2019 - Aon
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
PUBLISHED BY
INSURANCE ASSET
MANAGEMENT,
EUROPE 2019
Examining the economic and market
hurdles facing asset allocators in their
quest for outperformance
JANAUARY 2019
LEAD SPONSOR
THIS IS AN EXCERPT OF A FULL REPORT.
Download the full report from www.clearpathanalysis.com
SPONSOR Aon plc (NYSE:AON) is a leading global professional services firm. Aon’s insurer capital and investment solutions give clients access to the best capital and investment optimisation ideas, best research and best processes – enabling even SME insurers to benefit from the expertise and economies of scale often reserved for larger investors.
Section 1 - Whitepaper
1.4 WHITEPAPER
Uncovering and managing global investment
opportunities, managing tail risk, and adapting investment
strategies in a changing risk and regulatory environment
Gerard-Jan van Berckel,
Head of Delegated
Solutions – European
Insurers, Aon
For insurers facing a triple threat of economic, as governments look to return to pre-crash levels. But while central
banks try to reassert a ‘business as usual’ approach for the economy,
regulatory and political uncertainty, investment they are working against a backdrop of global uncertainty ranging from
returns are under pressure. Aon’s most recent the burgeoning US-China trade war, to problems in the Middle East
and, of course, Brexit. Some insurers are not waiting to see what Brexit
study of global reinsurers and specialty insurers deal transpires and have already responded to the UK’s impending
revealed that while total investment returns departure from the EU by setting up subsidiaries or entities in locations
like Dublin and Luxembourg.
(including capital gains) were at just under
4% – relatively stable since 2010 – underlying Brexit is also creating regulatory uncertainty. The UK government
has announced how it will deal with Solvency II as the Prudential
investment returns had declined to 2.6% in Regulatory Authority (PRA) and the Financial Conduct Authority (FCA)
2016 and 20171; the lowest levels seen since the take over2. Under Solvency II, preferential risk charges were available
for particular assets that came from within the European Economic
financial crisis of 2008. Area. Once the UK leaves the EU, this preferential treatment will end,
and those assets will have to be treated as if they were from any other
Despite the grounds for pessimism, however, there is opportunity country outside the UK.
out there for those companies prepared to think more creatively.
In particular, some insurers looking for better investment returns Regulatory issues aside, investors will need to consider what a spike
are turning to alternative asset classes – such as real estate and in interest rates could mean, in terms of credit spreads widening, for
infrastructure – that previously played only a minor part in their example, and what that would mean for their own portfolios. And
portfolios. Investment diversification by itself, though welcome, is not while equity markets are still buoyant, they are at the top of their
enough; the key is to unlock that value while taking a more holistic valuations and recent corrections, such as a 10% fall in the S&P 500 in
view of risk on both the asset and liability sides of the balance sheet. October, would suggest there is plenty of volatility ahead. In response,
insurers will need to start to position themselves to ensure their
investments are well diversified to prevent them from the downside
while at the same time being able to capture any upside momentum.
Shifting tectonic plates Many are already doing this. There is now a constant flight, according
to anecdotal evidence from our own clients and contacts, being seen
A decade on from the financial crisis, the financial tectonic plates from the usual asset classes – such as corporate credit and treasury
that shifted to allow for global recovery are starting to revert to their – to alternative asset classes that are more eligible and meaningful
pre-crisis positions. Quantitative easing (QE) is beginning to wind for insurance portfolios interested in taking illiquidity premium and
down – the European Central Bank, for example, ended its QE stimulus capturing additional yield. Diversification and return protection should
programme in December 2018 – while interest rates are on the rise be high on any insurer’s agenda.
1
http://thoughtleadership.aonbenfield.com/Documents/20180404-ab-analytics-rmo-april.pdf
2 https://www.gov.uk/government/publications/draft-solvency-ii-and-insurance-amendment-etc-eu-exit-regulations-2018
Insurance Asset Management, Europe 2019 3Section 1 - Whitepaper
The rise of real assets and real estate an aspiration to polish their ESG credentials, but any potential negative
impact on their investment portfolios means ESG factors can quickly
One asset class playing a role in this diversification is infrastructure and take a back seat. Today, and given the options available, there is no
real estate. UK property, for example, still offers a yield advantage over reason for any insurer to turn away from ESG for fear of an investment
bonds, with areas such as the private rented sector (including student downside.
accommodation) looking attractive. Part of the drive here, in addition
It is important to understand the entire premium flow: where the market
is; how it is developing; where the risks are; and how that knowledge can
all combine to deliver better performing portfolios
to the potential yields, is the security of these investments, which can Think about investment holistically
also deliver capital efficiency benefits under Solvency II. In 2017, EIOPA
reported larger insurance groups investing more in non-traditional Wherever an insurer chooses to go to find that yield and
asset classes, including infrastructure and real estate but also including diversification, the key is to think about investment more holistically.
mortgages and loans3 – in what it called ‘search for yield behaviour’ – We talk to our insurer clients about both sides of the balance sheet –
and there is no reason to believe this trend is abating. their assets and liabilities – and look at it from a capital management
perspective.
Another alternative option is investment in private debt asset classes.
It can be challenging to manage a portfolio of private debt and any What is happening on the liability side, for example? Perhaps some
insurer diversifying into that area will have to ensure it has best-in-class of those liabilities can be reinsured which will – as well as delivering
risk control in place. capital relief from a Solvency II perspective – help to free up additional
capital on the asset side. This liberated capital can then be used to
invest in better-performing types of assets to ultimately benefit the
bottom line of the insurer. It is important to understand the entire
Building sustainability premium flow: where the market is; how it is developing; where the
risks are; and how that knowledge can all combine to deliver better
A big theme also influencing insurers’ investment portfolios is ESG – performing portfolios.
environmental, social and governance. In particular, it is being pushed
by the regulators such as EIOPA and the PRA, which issued a draft Some insurers say they are completely integrated from a strategic
supervisory statement in October 2018 asking insurers to consider perspective when it comes to their investments and their
how climate change will impact their investment portfolios4. underwriting, but this does not always mean that the asset and liability
sides are aligned with each other. By taking a more holistic view of their
There is now a much greater awareness of ESG among insurers; risk, insurers can utilise all their risk capital to play an active part in the
it is certainly on the agenda now in Europe and gaining increasing overall profitability of the firm while helping to manage the economic,
attention from US insurers, given the impact ESG can have on political and regulatory uncertainties that are set to be a feature of the
reputational and operational risk. We see more insurers considering investment landscape for some years ahead.
ESG when they are making their investments. This is not just in terms
of thinking about the obvious targets such as renewables, either,
but also in areas with poor ESG track records, which means avoiding
certain sectors and some private equity activities.
The larger insurers are probably ahead of the game when it comes to
ESG, but for some others it is not so well developed. There might be
2
https://eiopa.europa.eu/Publications/Press%20Releases/EIOPA%20identifies%20a%20search-for-yield%20trend%20in%20the%20investment%20behaviour%20of%20insurers.pdf
4 https://www.bankofengland.co.uk/-/media/boe/files/news/2018/october/pra-consults-on-its-expectations-for-the-management-of-financial-risks-from-climate-change.pdf?la=en&hash=D-
2C1AD2854024009989560B4B54ED66E34CF1331
Insurance Asset Management, Europe 2019 4Experts at
BUILDING your
INVESTMENTS
Insurer investment solutions: our investment
and capital experts take a holistic approach to
enhancing your capital and investment returns.
To find out more:
e gerard-jan.van.berckel@aon.com
t +44 (0)20 7086 0695
aon.com/investmentuk
For Professional Clients only
Aon Hewitt Limited Registered in England No. 4396810
Registered office: The Aon Centre, 122 Leadenhall Street, London, EC3V 4AN.
Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority.
Aon’s Delegated Consulting Services (DCS) in the UK are managed by Hewitt Risk Management Services Ltd (HRMSL),
a wholly owned subsidiary, which is authorised and regulated by the Financial Conduct Authority.TO READ MORE FREE REPORTS VISIT: www.clearpathanalysis.com The opinions expressed are those of the individual speakers and do not reflect the views of the sponsor or publisher of this report. This document is for marketing and/or informational purposes only, it does not take into account any investor’s particular investment objectives, strategies or tax and legal status, nor does it purport to be comprehensive or intended to replace the exercise of an investor’s own careful independent review regarding any corresponding investment decision. This document and the information herein does not constitute investment, legal, or tax advice and is not a solicitation to buy or sell securities or intended to constitute any binding contractual arrangement or commitment to provide securities services. The information provided herein has been obtained from sources believed to be reliable at the time of publication, nonetheless, we cannot guarantee nor do we make any representation or warranty as to its accuracy and you should not place any reliance on said information. © Clear Path Analysis Ltd, registered in England and Wales No. 07115727. Registered office: 601 London Road, Westcliff-On-Sea, United Kingdom, SS0 9PE. Trading office: Business Design Centre, 52 Upper Street, London, N1 0QH W www.clearpathanalysis.com T +44 (0) 207 688 8511 E marketing@clearpathanalysis.com ClearPathAnalys clear-path-analysis
You can also read
