Articles - Asset Management for Insurance, Europe

This report published by Clear Path Analysis addresses the challenges faced by insurers and their asset managers as they seek to mitigate the risks arising from recent regulatory, economic and liability pressures, and adjust asset allocation strategies accordingly. Controlling $7trn in assets worldwide, insurers need to prepare for a shakeup in their asset management activities, triggered by continued market volatility, Solvency II and other upcoming regulatory changes.

 ♦ EIOPA takes a stance of “consistency and convergence” in the Solvency II momentum
 ♦ Market risks consists of nearly 60% of all insurers’ risks but Solvency II capital requirements remain fluid
 ♦ Insurers struggle to isolate asset classes with decent returns and quantitative easing reduces earnings on cash
 ♦ Asset managers claim global equity markets will benefit from a powerful tailwind and fixed-income will be overridden as the default choice in 2013

 Europe remains in regulatory turmoil but Carlos Montalvo Rebuelta, Executive Director, EIOPA, remains positive: “Solvency II is designed on the basis of a value at risk with a 99.5% confidence level {..} The new framework will enhance diversification because it not only brings transparency, but also foresees that capital charges are set up on the basis of risks you are exposed to.”1

 But how does this interpret for insurers’ asset management and liability structures? The Asset Management for Insurance, Europe report explores. In collaboration with EIOPA, FSA, AXA Investment Managers, Insight Investment, IBM Business Analytics and Zurich, asset management theory and practice are critiqued.

 The report brings together market leaders to debate the latest regulatory and economic landscape and how best to alleviate an insurer’s liability pressures. Insurers discuss why and how asset allocation strategies should be best adjusted to capitalise on new opportunities, achieve portfolio diversification, improve returns and mitigate risk.

 Asset allocation and portfolio diversification is changing and one such trend is a shift towards equity investing and new investment vehicles. Fiona Southall, Multi Asset Client Solutions– Product Specialist, AXA Investment Manager, “While equity investing is often perceived as racier than its fixed income cousin, investing in equities does not have to be as brazen as the global best-selling novel, Fifty Shades of Grey.”

 Southall goes onto to say; “…the dividend yield within equities can make up a substantial portion of total equity returns. A typical insurance investment strategy will aim to capture both the dividend yield as well as underlying earnings growth.”

 Beyond equity investing Charles Pears, Head of Insurance, Insight Investment, explores the latest alternative investment products and sources absolute return products and diversified growth funds as the solution. “In light of today’s low bond yields and unpredictable market environment, the case for looking beyond traditional investment approaches has rarely been more compelling.”

 Pears drills down to the specific benefits of each and for absolute return strategies stresses: “Rolling 12-month positive return targets help to mitigate any market timing issues when making initial investments, while the large size and cash bases of some absolute return funds can provide substantial liquidity for investors, even in stressed market conditions.”

 Solvency II means more than adjusting asset allocation models, under the framework European insurers should seek to comply with regulatory capital requirement and update their reporting systems accordingly. Patrick Braun, Principal Consultant - Risk Analytics, IBM Business Analytics, delivers a unique paper on the technical compliance with Solvency II and suggests insurers can comply with “the implementation of an idiosyncratic internal model, the usage of the more simplistic Standard Formula approach or the combination of both (partial internal models).”

 To view the full report please click here

 1 Carlos Montalvo Rebuelta, Executive Director, EIOPA, in ‘Asset Management for Insurance’ report, p.8.

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