Market volatility and a changing landscape have created a series of new issues that the insurance investment community must learn to navigate if they want to keep their capital safe.
"The best way for insurers to cover risk is to adapt their portfolios
to the post-pandemic market conditions."
In Clear Path Analysis’s recently released Insurance Asset Management - Europe 2022 report, several market experts from insurance groups including Aviva, New Re., LV+, ReAssure, explore how to navigate the post-pandemic financial markets and what investors need to know in the recovery phase.
Gary Zhu says the best way for insurers to cover risk is to adapt their portfolios to reflect the post-pandemic market conditions.
However the market is complex with some sectors showing bullishness, according to a survey last year from Deloitte, which said many insurers were expecting good economic times ahead.
"Zhu expects a stream of allocations into private markets as the asset
class moves into the mainstream."
Zhu thinks that the situation is more intricate, and the health of a portfolio depends on what market the company works in. “When we think about market volatility, it is important to differentiate between insurers and companies that have redemption risk, like hedge funds and money managers,” he explains. “Companies with redemption risk typically deal with outflows and forced selling in periods of volatility. Most insurance companies operate in a completely different landscape—and should look to take advantage of volatility.”
Zhu says he also expects a continued stream of allocations into private markets as the asset class moves into the mainstream. “COVID-related and inflation risks are well-broadcasted. Insurance companies need to think about the under-appreciated risks, especially pertaining to portfolio asset allocations.”
"Collateralised Loan Obligations and Credit Risk Transfers will provide
insulation from rates volatility and rising rates."
He says that many think of corporate credit as a single sector. “We would argue that when spreads are tight and there is not enough dispersion among asset classes, we should pay closer attention to the fragmentation of the market by considering different industry, maturity and quality characteristics – especially as many subsectors within the corporate credit market are moving along their credit cycle.”
As well as this, floating rate assets, such as Collateralised Loan Obligations (CLO), and Credit Risk Transfers (CRT), will provide insulation from rates volatility and rising rates.
“In a rising-rate environment, longer-term floating-rate assets tend to outperform because they provide insulation from near-term interest-rate volatility. Central banks are likely to raise rates in the near term, so intermediate and longer-term CLOs are poised to benefit without price appreciation, given their floating-rate nature.”
Currently, in the UK the interest rate sits at 0.5%, with another evaluation of the bank rate due on March 17, 2022.
Whilst these issues dominated the long-term market, short term issues such as the outcome from supply-chain issues in 2021, and when they ease, will drive inflation and market returns, he says.
