Coming into 2021, as we face historically low interest rates, looming government debt and the risk of corporate defaults, investors may be tempted to cut their losses. The disappointing performance of investment-grade bonds have led insurers to seek out alternative sources of yield, which may bring additional risk factors. 

The discussion focused on navigating through volatility, the macro-economic forces shaping risks for balance sheets, the challenges of an ultra-low interest rate environment, regulatory changes such as IFRS 17 and IFRS 9, managing products with investment guarantees and ESG considerations, among other topics.

Below are some key takeaways:

Stuart Jarvis, quantitative research director, global investment solutions, Columbia Threadneedle Investments

“We've seen a move from guaranteed products towards investment-linked products, due to low interest rates and an increasingly transparent regulatory regime.”

  • Interest rates are likely to be even lower for even longer – looking at US treasury rates, the peak seems to be getting ever lower with each consecutive cycle. Market expectations of rising rates have failed to be realized over the last few years.
  • On the demand side, the age profile of Asian economies has risen over the past few decades – the rise of the middle class in Asia means that the kinds of products required now are different from those of ten or twenty years ago, reflecting a need to cater to an increasingly sophisticated wealthy older population.
  • Regulatory change also presents its own challenges – with some countries moving more quickly than others in a transition towards risk-based capital regimes, including Basel II and III for banks' capital requirements, and IFRS17 coming in 2023, while the International Insurance Capital Standard is currently in a monitoring period; this leads to rapidly evolving local regulations which insurers need to stay on top of to ensure they are in compliance.
  • Insurers should let investors share risk given the current market conditions, while still giving confidence in outcomes and considering capital, investment and product strategies.

Lorenzo Garcia, head of investment solutions, EMEA & APAC & global head of solutions design and research, Columbia Threadneedle Investments

“Different clients have different appetites for risk - this has to be embedded into our long-term view for products.”

  • When it comes to strategic asset allocation, it is rarely a good idea to optimise returns without taking risks into account; yet it is often possible to reduce capital with minimal impact on risk/return efficiency. While traditionally static, allocations can also be actively managed; making use of strategic beta allocations, stock selection, tactical asset allocation, and dynamic de-risking.
  • Risk-rated investment-linked products can be designed to fit third-party risk bands and retirement / savings needs for end-investors, using Morningstar risk bands – defensive, cautious, balanced, growth and aggressive, with corresponding fixed income / equities allocations.
  • Customised fixed income continues to be of great importance for insurers; taking into account capital protection, regulatory constraints, and yield objectives to deliver optimised tailored solutions. Using a systematic portfolio construction process, guided by algorithms which help to do things such as minimise capital charge, maximise yield, minimise cashflow mismatch or duration mismatch, a model portfolio can be output from given objectives and constraints.

Boris Moutier, chief investment officer, AXA Hong Kong and Asia

“Right now there is nowhere to find a yield-curve that is high enough to support a substantial guarantee… so we need to move to different types of products.”

  • The past year has seen some interesting interplay between short and longer-term rates. To some extent, in some jurisdictions, portfolio managers can put in place controlled leverage.
  • The partial decoupling between the US and China means there is an ability to invest more directly into China, which represents a new opportunity.
  • The crisis has also provided an opportunity to evaluate the performance of portfolios in a new and unforeseen environment.
  • Public credit remains a question mark, as it is becoming more expensive by the day; equities pose a similar challenge, because of valuations. From a process perspective, there is a challenge in disentangling investments which are correlated, such as interest rates and value; these are key considerations to bear in mind ahead of investment planning for this year.

Benjamin Rudd, CFA, chief investment officer, Prudential Hong Kong

“Part of the lesson we have learned (this year) is the importance of constantly running stress-testing on the portfolio; none of us here could have ever forecast what has happened this year.”

  • Unpredictability requires stress-tests to ensure an understanding of the impact of certain scenarios; providing a roadmap for next steps and preparing stakeholders to understand why specific actions are being taken.
  • Insurers should be prepared to take advantage of market dislocations – flexibility can enable attractive foreign-currency opportunities, as a result of cross-currency basis swaps, for example.
  • There is an advantage in Asia, in that balance sheets are largely still growing. The challenge for insurers in the region today is how to deploy the incoming cash, rather than moving it around.
  • While interest rates have been the biggest driver in how to manage balance sheets and overall risk, there is a need to look at portfolios on a holistic basis – such as having large exposures to certain factors such as value which are highly correlated to movements in interest rates.
  • In the past year, moves in spreads were driven by liquidity; underlying credit risk was often ignored but it is crucial to understand underlying credit risk of the portfolio, in both the liquid and illiquid spaces.

Watch the full webinar here to learn more.

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