Diversification to commodities, real assets and derivatives has been key to managing interest rate and inflation concerns, top insurance executives from AIA and Sequis Life said during the AsianInvestor Insurance Investment Briefing Southeast Asia held in Singapore on Friday (September 23).
Over the past few years, AIA has worked to manage changes in regulatory standards, for instance, those to do with solvency rules and IFRS 17 particularly in Hong Kong, said Trevor Persaud, group head of investment strategy and solutions at AIA in Singapore.
Now that’s been done and dusted, the insurer can shift its focus to recalibrating its portfolio as central banks tighten monetary policies at an unprecedented rate and investors look beyond public markets to find yield amid bearish sentiment on listed equity and bonds.
“Standard asset classes that serve as well for decades, which, until about a few years ago, was credit, long-dated corporate bonds, and that was the basis of pretty much most of our investment strategies,” Persaud said. “In terms of portfolio diversification, we make sure we have access to a wide range of capabilities, and have been investing in building our own understanding and capabilities in other asset classes.”
“In terms of using barbell approaches, to manage the overall risk and return matching versus a return-seeking portfolio, getting those different approaches to how we might structure our portfolio into the process has been quite key,” he added. “Alongside that came the need for a framework around tactical asset allocation, a framework around how we might use derivatives.”
The firm has invested heavily in its capabilities to overcome regulatory hurdles, to trade derivatives, and “the operational and collateral-related stuff” during this period of market volatility, he said.
“The intelligence around the different options you have in the interest rate space to manage your portfolio is critical for an insurance company's overall investment strategy.”
Balancing liquid and illiquid assets continued to be a focus of the firm’s portfolio as well, for instance, “trade finance is interesting, which goes back to the former point around managing interest rate risk better.”
“The idea of having a clear framework around your portfolio allows you to shorten your credit and trade finance assets, bank loans, securitised fixed income instruments, and high yield,” he said.
On inflation specifically, Persaud said that popular inflation products include real assets even though they “take a long time to get invested into the long term”.
He also acknowledged the growing conversation around private assets, which goes back to the liquidity element and the need to think about assumptions made about drawdown, versus commitments around time-weighted returns and the internal rate of return, he said.
On inflation protection, Sequis Life continues to use commodity allocations, said chief investment officer Muhamad Umar Johan Sidik, who had flown into Singapore from Jakarta for the event.
“Every insurance company has classic processes put in place such as stress testing, sensitivity analysis, liquidity monitoring and so on,” he added.
He added that the insurer works regularly with regulators “to always reassess the gaps in the framework, governance, risk governance that we adopt to have much faster ad hoc meetings with the Investment Committee and risk committee for example. And then, you need to always improve the structure of your risk and investment governance committee.”
The firm also constantly updates its datasets to assess risk metrics to find possible new risk candidates for instance, then find ways to implement new models, ensuring the right infrastructure, capabilities and models of volatility are put in place.
“Basically, you need to always assess how the how the investment process infrastructure makes your organisation more rational, or visually smarter, tactical and more consistent in performance,” he said.
The panel also touched briefly on Indonesia. “One of the things I observed in Indonesia is clearly the development of local capital markets is going to be key in terms of building capabilities. So, local fibre assets local loan access, that type of stuff must be high on the agenda in terms of building out those capabilities,” Persaud mused.
Indeed the Indonesian government has been trying to incentivise local players to invest within the country, Johan said, which the Sequis balances with its offshore investments, which it has been doing for 10-15 years.
Click to find out more about the AsianInvestor Insurance Investment Briefing Southeast Asia.