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What are the best ‘Investment Solutions for Insurers’ in a changing economic landscape?

  • New white paper from CAMRADATA –

A leading provider of data and analysis for institutional investors has published its latest white paper, ‘Investment Solutions for Insurers – solutions for a changing landscape’ following a recent roundtable event where insurers, consultants and asset managers discussed which alternatives to traditional asset allocations could deliver good yields in a more challenging investment market.

The discussion focused on the fact insurers want extra returns in fixed income and to lower the sensitivity of their investment portfolios to equity markets.

The panel of guests said that alternatives have already been introduced in a bid to diversify yields including CLOs, long lease commercial real estate, assisted housing for the elderly, Multi-Asset Credit and Alternative Risk Premia strategies.

Sean Thompson, Managing Director, CAMRADATA said, “Insurers are increasingly looking beyond familiar investment strategies to maximise their returns. They recognise the markets have enjoyed bumper returns in recent years from bonds and equities, but now expect lower returns as economies, notably the UK, struggle to grow strongly – they are looking for new solutions.”

The influence of data-modelling in asset allocation

The influence of data-modelling in asset allocation and risk-return scenarios was discussed. Insurers have long relied upon mathematics to build risk profiles for both liabilities and investments. With the increase in computing power, data models can now be fiendishly complex and deliver huge amounts of information reports daily. However, the guests doubted that processing power necessarily makes for better investment portfolio construction or more reliable investment returns.

Daniel Banks, investment consultant with PSolve said, “Some asset managers are proposing strategies with prospective returns calculated to two decimal places, but we need to be very careful with anyone touting that kind of precision. I would rather they gave a range of returns, because altering any input to the model will change expected returns.”

Banks added that words such as ‘optimisation’ should be replaced by ‘robustness’. Chris Price, head of insurance solutions, UK at AXA IM, agreed that techniques such as optimisation are just tools to develop scenarios to which expert judgement then needs to be applied. He quoted one insurance CEO who said, “I would prefer a good underwriter with a pencil than a bad underwriter with a model.”

Ian Coulman, chief investment officer at Pool Re, said, “We occasionally get involved in optimisation. These methodologies’ biggest growth is in second line reviews or sense checks, not recreating the world.”

Scott Eason, investment consultant at Barnett Waddingham, an advisory firm to institutional investors added, “We cannot begin to talk about optimisation because most medium and smaller insurers in the UK are not accessing 99% of the universe of assets. Despite the talk about alternative assets, in the UK 70-80% of providers’ assets are still in gilts, investment grade corporate bonds and equities.” 

Record low yields encouraging Insurers to explore alternatives

Pool Re has put 5% of assets to work in a Multi-Asset Credit Strategy, giving the manager freedom to allocate to High Yield, Emerging Market Debt and Loans wherever best value lies. Another 2.5% of assets in the risk portfolio will soon find their way into Alternative Risk Premia mandates. The company is diversifying its mandates, taking some risk from long-only equity. Pool Re still has 60% of assets by value in short-dated corporate bonds and sovereigns, and 20% in index-linked gilts.

AXA IM has offerings which it believes can help UK insurers vary and improve their sources of return, including a fund of long lease UK commercial real estate. The basic advantages are long duration and sensitivity to price rises. A second offering from AXA IM is Collateralised Loan Obligations (CLOs).

PSolve’s Daniel Banks had a different take on analysing new or unusual asset classes and strategies. PSolve’s aim is to understand the drivers behind any investment, instead of taking for granted the claims of any prospecting asset manager about its strategy. This discipline means challenging widely-regarded beliefs in investing, such as the inflation linking power of property.

Banks said, “We looked at the UK property market in aggregate and found that over time its link to inflation was not that strong and in some cases, could even be considered negative.”

What is the outlook for the future?

The guests also discussed the fact that despite geopolitical uncertainty, returns from financial assets had been excellent. While newspaper headlines were full of shocks and revelations, volatility on capital markets has been remarkably low.

The consensus was also that economic growth will continue in the USA and pick up elsewhere. The complex uncertainty of Brexit, however, was expected to stifle the Bank of England’s role, leaving it likely to make just a couple of 0.25% rate rises at most in the next eighteen months.

Finally, Chris Price suggested that Quantitative Easing had reduced spreads significantly. He said, “The question now is what Quantitative Tightening will do”. Central banks’ attempt in 2011 to tighten fiscal stimulus proved premature and damaging across Europe.

Referring to the “new normal”, Ian Coulman said that if all yields have moved down in step, there is no reason to change asset allocation dramatically. He also pointed out that all assets are expensive by historical standards, but insurers should look for alternatives. He added that they will have to accept lower yields across the board and concluded, “A steepening of the yield curve is what insurers really want but I am not sure we are going to get it.”

Sean Thompson, Managing Director, CAMRADATA said, “Our roundtable discussion analysed the best investment solutions for Insurers in today’s changing economic landscape. It makes essential reading for insurers who are looking for alternatives to tackle their investment challenges this year.”

For more information on CAMRADATA visit

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