Case study: How Aspen is tackling liquidity needs amid a perfect storm of risks

Sara Benwell: How are you thinking about liquidity at the moment and what do you invest in, within your central holdings?

Matthew da Cunha: It is quite an interesting time and it isn’t just thinking about the Covid-19 environment.

Aspen is one of the syndicates of Lloyds of London, and there have also been a lot of hurricanes, wildfires, and explosions in Beirut.

Often it is quite easy to think about Covid-19 alone, but there is really almost a perfect storm in the market at the moment.

"Money markets does provide short-term flexibility to

 release cash when we need it."

We need to think about liquidity and how important it is. Flexibility is key and something like the money markets does provide short-term flexibility to release cash when we need it, as it is really hard to forecast things like hurricanes and wildfires and it can be quite sudden or urgent when we have a requirement for cash.

That’s why we place some of our cash in the money markets.

Other options we consider are fixed term deposits where we stagger the maturities to provide the liquidity, but these still don’t provide the flexibility in cases where there is a hurricane, we need to get cash now and have a liability that we need to pay. We are quite happy to still be investing in the money markets.

Sara: Would you be willing to invest in negative rates? To what extent is yield important to you and is it a priority when you are looking at these kinds of short-term cash tool options?

Matthew: It is more of a psychological barrier and we are operating in a very low yield environment with the Covid-19 environment making central banks slash interest rates so that even if it is a positive yield, you are not going to be getting much anyway now.

"Yield optimisation isn’t a priority for us."

We are a dollar-based company so luckily, we do earn some yield on our currencies but on the priority list, yield optimisation isn’t a priority for us. It is more about getting the liquidity when we need it and diversifying the cash across our main banks in this environment.

We are also very heavily regulated, like the whole of the insurance industry, so we can only hold a certain amount of cash before you get asset concentration charges. So, it is always about diversifying and focusing on having cash when we need it.

Sara: We are heading into a second lockdown due to Covid-19. Do do you feel that insurers are more prepared for this and what might it look like?

Matthew: We are more prepared for the second wave, firstly in terms of working from home, everyone is used to it now. In the first wave this was a new thing for people to become comfortable with and how they communicated as a team.

Also, in terms of the FX volatility, at the start in March the sterling dollar rates dropped to 1.14 and now we are at 1.33 with the second wave but because of the vaccine news it has had support for the sterling and dollar rates.

"Managing the hedging has been a priority from the

first wave to the second."

This is very important for us, as we have very large exposures all around the globe in many currencies. Managing the hedging has been a priority from the first wave to the second wave to make sure that we are hedging the right exposures and monitoring the FX volatility, as this can have a real impact to our bottom line.

We are now also holding more liquidity in branches because of the FX volatility and because you never know when claims may arise, so we are holding more surplus in cash with our branches and bringing less back to the UK.

Sara: How is the world of cash management changing and what things are you doing to manage your intraday liquidity?

Matthew: A big priority for us is around technology and the treasury management systems (TMS) that we are implementing to help with our forecasting.

Automation is key. I come from a Fintech start up background working in start-ups where technology was the focus, and I have noticed in the insurance industry that it is not as agile.

This makes sense as it is an older traditional industry, but there is a lot of room in cash management for using automation, as well as connecting different systems.

For instance, with money markets funds, we can connect them to our TMS system so that you can forecast your cash and if you realise you have surplus of cash, you can make a transfer to the short-term money market fund and the TMS is all FTP so it will process through the system, it can record the ledger in the accounting system and also gives us a live cash position of our forecast based on the transfer.

Our priority at Aspen is to utilise our systems and link them so that we have a live picture of our cash, and this enables us to make better decisions.

Sara: You mentioned that certain elements of regulation were impacting what you were holding and why, is this a trend that you expect to continue?

Matthew: Yes, as the environment continues, we will need to hold more cash with branches, more solvency and liquidity.

There is more attention on liquidity from the regulators of the insurance market because of the environment that we are working under and I would imagine that this will continue going forward where you have to hold a certain amount of liquidity.

It can work both ways as sometimes the regulations state that you can only hold a certain amount of cash in certain countries, onshore and offshore.

"We will need to hold more cash with branches."

So, you have to hold liquidity in branches, but you can’t hold too much with a certain bank, so you then need to diversify your exposure from one bank to another bank.

For instance, in Singapore there isn’t a money market that you can really invest in because it isn’t a big market. There is then the balance of holding liquidity but also needing to diversify it amongst the branches.