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June Voting Insights: Insurers’ internal focus throws up shared concerns

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Posted July 6, 2017

By David Worsfold

Insurers’ long, weary quest to find yield shows no signs of abating, according to the audience survey results from the recent Insurance Investment Exchange seminar on 13th June 2017. However, internal factors are also forcing their way up corporate agendas with many senior investment officers questioning whether their own organisational culture and business models are fit for purpose.

The strong focus on yield has been consistent among audiences in the last couple of years but the tide is turning, it seems, as the current bull market grows long in the tooth and uncertainty mounts. None of the attendees this time saw prioritsing yield as the best way for insurers to respond to the current investment environment, with over half – 52% – opting instead to focus on downside protection. A strong alternative approach for many insurers has been to ignore volatility in favour of working to exploit longer term trends, a strategy that appealed to almost a third of the audience.

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The appetite among insurers for moving away from their traditional core fixed income assets was also discussed, in particular, what percentage of their core fixed income assets did they expect to reallocate to other strategies over the next two years.

In the past, the response has been conservative with most insurers prepared to re-allocate a small percentage of their portfolios in this way. Not so this time.

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While 38% thought they would re-allocate up to 10%, another 38% thought that as much as 20% of their core fixed income assets were up for grabs and almost one-fifth were looking at re-investing over 20%. The numbers are stark, perhaps revealing a growing exhaustion of hope that core fixed income can deliver the returns being demanded.

Looked at the other way, nobody expected to be significantly increasing their core fixed income allocations over the next two years, with the focus shifting to other forms of credit with enhanced risk premiums, be it through illiquidity, complexity or otherwise.

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For some time, the interest in illiquid credit has been growing strongly and this was the theme of several presentations at the event. It is the asset class most likely to see the greatest increase in allocations over the next two years, said over two-thirds of the audience.

These changes in sentiment towards assets classes have seen gradual – often subtle – shifts over the last two years. That is in comparison to the views on internal factors – these have turned sharply negative over the last two IIE events.

The key bottleneck to creating better insurance portfolios is no longer the price of assets or even the regulatory treatment of capital. It is a lack of internal expertise and resources, according to 45% of participants.

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This negativity about their own firms was also the key message when asked to opine about the greatest challenge for insurers today. The percentage who felt “Making the business model work” was the number one issue pushed up from 30% last time to 42% this time, leaving the rest of the audience split between the more predictable concerns of either finding capital efficient strategies and assets or finding alternative sources of return and/or yield.

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One consistent response across all the questions where it was referred to was the lack of concern about macro-economic issues and their potential impact. This is in sharp contrast to previous events.

What does it mean? Does it suggest that the new norm of geo-political uncertainty is now just part of the scenery? Or that the real challenges from Brexit are some months or years away and that the fears about the potentially disruptive economic policies of Trump have subsided?

Taken with the answers to some of the other questions, however, there was a strong feeling among the audience that blaming external factors for the struggle to maintain returns at the required level is not the whole story: internal weaknesses need to be addressed too.

The audience polling is a integral element of Insurance Investment Exchange events and helps shape the programme and choice of speakers for future events. At every seminar, people are asked what they would most like to hear about in the future.

The next Insurance Investment Exchange event takes place on Tuesday 19 September and is entitled “New assets, old liabilities: enhancing returns on capital”. You can register your interest here: http://www.insuranceinvestmentexchange.com/event/new-assets-old-liabilities-enhancing-returns-capital/

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