Insurers looking at increasing return in capital efficient ways
Regulatory constraints a key determinant of insurers investment strategies
No further move to passive investments
Insurers looking at increasing return in capital efficient ways
Addressing the ongoing yield challenges, the survey confirms the trends witnessed over recent years, with 59% of participants expecting to increase their use of alternatives, mainly in the fixed income strategies, employ more tactical asset allocation (38%) and create more diversification in their traditional fixed income portfolio (36%).
Nearly 40% of respondents cited ‘outsourcing a greater proportion of the portfolio’ as a direct impact of Solvency II on their investment portfolio, a commonly used technique to get greater access to non-traditional asset classes or expertise.
Similarly, 53% asserted that they do not expect to see a reduction in the number of external managers they used for their portfolios as a consequence of the Solvency II legislation.
Bettina Ducat, Global Head of Product, Retail and Institutional Development (PRID) at AXA IM said: “We are experiencing considerable demand across client segments, but especially in the insurance market, for our non, or less liquid strategies. Senior loans, private debt strategies and real assets thematics like infrastructure debt and real estate debt are proving popular as a way to capture extra yield.”
Mathilde Sauvé, Head of Institutional Solutions at AXA IM added: “Illiquid assets may appear the ‘perfect deal’ for insurers but this relies on the asset managers’ ability to provide a quick ramp up for investors whilst sourcing the best opportunities in the market. An alternative and new trend we are observing is increased demand for total return strategies - perhaps the solution for those who seek performance through tactical asset allocation coupled with risk mitigation.”
Regulatory constraints a key determinant of insurers’ investment strategies
40% of respondents consider the Solvency Capital Ratio (SCR) a more important consideration than traditional risk/return analysis. It was clear that regulation is on insurers’ radar as we enter 2017 as 47% of survey participants pointed to regulation as a significant challenge.
The survey also proves that some of the intended consequences of Solvency II have begun to emerge, 53% of total respondents noted better risk management by improving their Asset and Liability Management (ALM), more specifically a reduction of the portfolio’s duration gap. Similarly just over half (52%) of insurers have reduced their overall risk profile of their portfolios - a logical consequence to the higher solvency capital charge attached to traditional risk assets such as equities.
Mathilde Sauvé, comments: “The tightening regulation has noticeably shifted the investment decision-making paradigm for insurers. Over half our respondents reacted negatively when asked about operating under Solvency II, but the greatest effect was no doubt felt by the small sized insurance companies, where 72% of small2 insurers gave negative responses. Our results highlight the importance for insurers of sourcing assets or strategies that hit the ‘sweet spot’ between higher yielding assets and a manageable SCR – such as senior loans or private debt.
“Specifically, in the UK, the matching adjustment rule is focusing the efforts of annuity insurers, by searching for long-dated higher yielding assets which can be included in these portfolios, such as infrastructure debt or long lease albeit some structuring may be required to achieve this.”
What insurers want from their asset manager
Close to 70% of the surveyed insurers rated the ability of an asset manager to offer strategies for capturing returns as ‘very important’ or ‘important’ criteria, despite the high regulatory costs of certain high-return asset classes under Solvency II. Other criteria of heightened importance included the asset manager’s experience managing within an SCR budget (59%) and ALM capabilities (65%). Insurers expect full Solvency II reporting capabilities of their asset managers with 57% classifying this criterion as ‘very important’ or ‘important’; the challenge of Solvency II reporting is heightened by the move towards more alternative asset classes.
Bettina Ducat, Global Head of PRID at AXA IM said: “AXA IM shares in the belief that these areas of expertise are necessary to be a strong partner on the investment or operational side. What is more, we think it is critical to be able to fully customise our solutions to each insurer’s particular circumstance; one size does not fit all and asset managers have to be able offer bespoke solutions.”
No further move to passive investments
For a majority of insurers (56%), the impact of Solvency II has not included a move towards more passive investments, unlike other types of investors. This is echoed in the fact that 59% of insurers are likely to increase their allocation to alternatives, illiquid assets (33%) and increased use of tactical asset allocation (38%).
Bettina Ducat, Global Head of PRID at AXA IM concludes: “In the context of tightening regulation, active and nimble investment management plays a key role in navigating a complex investment environment and complex products. Focusing only on capturing market beta in most cases does not suffice to meet performance objectives.
“As one insurer put it ‘we are still in a kind of test phase with Solvency II’. Further legislative and regulatory changes will have a significant impact on insurers such as IFRS 9 and PRIPPS; it is vital insurers select the correct partner to face these headwinds.”
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