March 2019 seminar report: The Changing Landscape
The first Insurance Investment Exchange seminar of 2019 set out to capture the mood of uncertainty sweeping across the economies of the developed world and analyse its impact on the assets insurers have relied on to ensure they meet their obligations and contribute to the success of their businesses.
The opening remarks of the morning’s chair, Paul Abberley, CEO of Charles Stanley, perfectly summed up the extent of that challenge: “For twenty years we all travelled along the tramlines of the Washington consensus … When you look at the stewardship of assets there isn’t that certainty we once enjoyed”.
Carl Emmerson, deputy director of the Institute for Fiscal Studies, used his keynote address to explore the current state of the UK’s public finances by delving deep into the options the Chancellor of the Exchequer, Philip Hammond, now has following his recent economic statement, almost overlooked amid the noise and chaos surrounding Brexit.
The forecasts in it set out the options for the government with an anticipated improvement in the annual deficit of £8bn by 2023: “Hammond chose to bank it rather than spend it”, said Emmerson. However, with the commitments to protect spending on the National Health Service, defence and overseas aid and the implications of the Barnett formula for spending in the nations and regions of the UK, this would mean annual cuts of £2.5bn to the unprotected departmental budgets if no new money is found.
Into the mix has to be added concerns about weak productivity and the ageing population, factors which point to the possibility of tax increases, said Emmerson. His analysis of international comparisons of the tax burden suggested that the UK had room for manoeuvre when it comes to increasing taxes.
This set the scene for the first panel session which explored how longer term economic and political trends are impacting insurers.
Jamie Whyte, former head of research for the Institute for Economic Affairs, looked back over several decades at how governments had moved from owning businesses as a route to controlling the economy to using regulation. This makes the competence of regulators an issue, something at which technocratic states like Singapore score well.
While there are some causes for optimism, according to Darren Williams, director of global economic research for AllianceBernstein, as the US Federal Reserve starts to normalise monetary policy and China starts to address some of its structural issues, inflation looms as a serious concern: “One thing we have learned over the last ten years is that we don’t understand inflation very well”.
2017 was the last “easy year” cautioned Van Luu, head of currency and fixed income strategy at Russell Investments, and all the focus was now on when the next recession would grip the US economy. He said the inversion of the yield curve was one of the most reliable predictors of this and it was already happening. This means 2020 is now the danger zone for assets whose value is dependent on the US economy.
The continuing impact of prudential regulation on investment strategies remains at the top of the agenda for the Association of British Insurers, said its assistant director and head of prudential regulation Steven Findlay. He was critical of the 2018 review of Solvency II carried by the pan-European regulator EIOPA (European Insurance and Occupational Pensions Authority) which he said was “a real opportunity missed”. The 2020 review would create a fresh opportunity to look at the matching adjustment and longer term guarantees.
He also sounded one of the few notes of optimism over Brexit saying “it could give us an opportunity to take back control over some aspects of regulation under Solvency II”.
The second panel was given the intriguing brief of exploring “Mindfulness for insurers”, neatly summed up by chair Paul Abberley as “asset allocation yoga” and the panel quickly demonstrated just how flexible insurers will have to be as the economic storm clouds gather and darken.
“Moving to 100% passive now could be the worse move ever”, said Daniel Blamont, head of investment strategy in the corporate development team at Phoenix Group. He predicted defaults and downgrades “but more like 2001/02 than 2009, so gradual and limited”
Andrea DiCenso, vice-president of Loomis, Sayles and Company, took up the default theme, urging insurers to look carefully at previous global trends in default cycles. She added that other factors could prove disruptive and uncomfortable for insurers with central banks looking to stick with the lower for longer and strategy and the potential for disputes between China and the USA to escalate.
The boldest prediction came from Foresters Friendly Society Board member, Erik Vynckier, who focused on the prospects for Sterling: “I think in five years from now the Sterling credit market will have effectively stopped functioning with most credit being issued in Dollars, Euros or Renminbi. In the UK, investors will be limited to government bonds and UK infrastructure.
Iain Forrester, head of investment strategy at Aviva Investors, said insurers would need to understand how customers wanted them to invest to be sustainable and that this would inevitably lead to greater transparency and visibility in insurers’ portfolios.
Attendees also had the opportunity to go into a broad range of topics in more detail during the breakout sessions:
• AllianceBernstein: Commercial rest estate debt opportunities in the US
• Aviva Investors: New Business Models, New Investments
• Russell Investments: A holistic approach to outsourcing
• Natixis Investment Managers: Infrastructure opportunities in the US municipal bond market
The next Insurance Investment Exchange seminar will take place on Tuesday 18 June when the topic will be ‘All Change! The evolution of asset management’.Category: Commentary, News