It is not a new pronouncement that diversification in insurance investment can be a prudent financial choice. If one industry or asset line feels the pinch, whether that be due to geopolitical tensions, shortages or manufacturing faults, interest rate fluctuation, natural disasters, or myriad other issues, then a well-balanced portfolio can help weather the storm.
In a recent Clear Path Analysis panel discussion, Douglas Nicol, Head of Shareholder Assets at Scottish Widows, discussed ways to mitigate the effects of this and what the pandemic exposed in this area.
“Some of the people who did very well out of [the pandemic’s effect on the markets] were those were prepared to go into different sectors.”
Nicol spoke in Clear Path Analysis’s Insurance Asset Management - Europe 2022 report, which featured several market experts from insurance groups including Aviva, New Re., LV+, ReAssure, exploring how to navigate the post-pandemic financial markets and what investors need to know in the recovery phase, including financial stress concerns.
Nicol said portfolio diversity was influential to Scottish Widows investments during the recent market turbulence of the pandemic and helped significantly. “Some of the people who did very well out of [the pandemic’s effect on the markets] were those were already prepared to go into different sectors, currencies, or asset classes,” he said. “As a result of this, for having the ability to have a diversified portfolio and diversified set of asset classes, we did well and took some opportunities out of it.”
In an MSCI report, the company backed up this strategy, saying that “At the corporate level, companies with assets, revenues, supply chains and operations across multiple locations may have been more resilient to local disruption in economic and business activity. Following this [Covid-19] crisis, risk diversification, in addition to revenue growth and cost reduction, may become an increasingly important driver of business and investment decisions.”
“Covid-19 hit everywhere, so assets across the globe
were hit in separate ways.”
Covid-19 also exposed the need for investors to build globally diversified portfolios and led to discussions around the recovery rates of distinct parts of the world. It also exposed the need to have more spread on a geographical basis. For instance, Europe, Asia, and North America all experienced divergent economic growth rates through most quarters of the past eighteen months.
“Covid-19 hit everywhere, so assets across the globe were hit in separate ways and different currency of assets were hit to different levels with the economic support coming in,” says Nicol. “For example, it created opportunities between the US and GDP in fixed income.”
However, he adds, when insurers were looking at what was happening in the markets and trying to protect their portfolio through this phase, there were some trades that several market participants put on to try and protect their portfolios because there were opportunities there to do it.
“There are just different pockets of liquidity that you can then go and
access when some of the other ones dry up”
“Exactly how much it protected in the first instance is difficult to assess, because you got hit everywhere,” he says. “The ability to take advantage, be able to go into different currencies, take different sector risks that you don’t have, was made available. Even looking at the GBP market for instance, we are primarily GBP and US based, and with the GBP markets there is a lot less liquidity in the bond market,” he added.
“There are just different pockets of liquidity that you can then go and access when some of the other ones dry up,” Nicol said. With an uncertain future, many investors believe, consistent themes such as diversification remain hugely important to insurance portfolios going forward.
To learn more about this issue and others facing insurers, read our report Insurance Asset Management Europe here.
