Taking Stock and Planning Ahead

Extreme market conditions have exposed many previously (relatively) stable relationships that underpinned proxy decision making. For example, even at the headline level Consumer Prices Indices within Euro area economies have varied significantly¹. These basis risks support the approach of diversifying when selecting real assets versus real liabilities when no true like-for-like hedge is available, incorporating, for example, equity and property alongside index-linked bonds.

Swap and bond rates have disconnected, with swaps underperforming high quality bonds, causing significant performance differences for proxy bond benchmarks to swap discounted liabilities. This has also resulted in investment opportunities; with issuers whose prices tend to align with swaps cheapening inline. Low risk, low capital, assets like covered bonds are offering their best outright and relative (versus government) yields for years.

Using mutual funds for opportunistic and satellite allocations is less attractive under the updated IFRS (International Financial Reporting Standard) classification. Larger accounts and more complex account aggregation methods are needed to maintain amortised cost accounting benefits. IFRS9 may therefore hamper insurers’ appetite to allocate to higher risk asset classes if costeffective implementation is difficult.

Recent events have underscored global connectivity. Whilst generally recognising man-made climate change, there remain significant differences of opinion between countries on how they are best addressed and on what timeline. 2021 was the 16th consecutive year of decline in global freedom² which reflects that countries’ policy decisions are often made for the benefit of the few versus the many – locally and globally. Fragmented regulatory approaches, conflict, opportunistic profiteering from (typically private) enterprise have all contributed to, recently, derailed attempts at addressing global challenges, including decarbonisation. Related impacts on energy markets have helped roil financial markets. To manage risks and assess opportunities, over the long-term horizons needed for our insurance clients’ portfolios, portfolio managers and their decision support tools need to be supported by appropriate sustainability data, research and stewardship advice.

Our vast experience of insurers, hardwired via our parent company, ensures the knowledge and flexibility to assist. This may be through something as relatively straightforward as an agreed Key Performance Indicators (KPI) assessment process, which formalises flexibility to respond to clients’ holistic requirements (e.g., P&L steering versus a pure relative performance focus alongside incorporating decarbonisation targets). Elsewhere it may incorporate solvency-capital adjusted optimisation to asset allocation coordinated with downside P&L and capital protection (risk-controlled strategies). We would welcome a conversation on how our global teams can assist with your insurance asset management challenges.