Felix Schlumpf: Insurers are invested in illiquid asset classes like real estate, private equity and private debt.
This is not done solely to diversify but also to earn an illiquidity premium. It is important though to manage the illiquidity risk in order to not become a forced seller of these illiquid assets.
"Smart Beta is an elegant way to add additional beta return with low
correlation to the core portfolio without increasing the market risk."
Another investment strategy of increased interest to insurers is factor investing, also known by the more popular term of “smart beta”. This is an elegant way to add additional beta return with low correlation to the core portfolio without increasing the market risk.
The low yield environment is indeed a challenge. One important consideration of using a smart beta approach, is to have reasonable return expectations and to be able to communicate them to the relevant stakeholders. For instance, some life insurance products with guarantees are not possible anymore in today’s low yield environment.
Erik Ranberg: We have been particularly cautious, not running too much of our portfolio assets in illiquid securities.
We don’t feel that the illiquidity premium is very onerous but at the same time, when you go for these asset classes you are going into new knowledge areas, i.e. you must ask yourself whether you have the expertise to manage these asset classes, like infrastructure.
"You must ask yourself whether you have the expertise to
manage these asset classes."
We have had quite a lot of experience with real estate and private equity, for many years now, so illiquid investments are not new to us. However, we haven’t pilled further into these asset classes due to their regime, we have remained very stable.
For those who haven’t been in these asset classes, it might look as though there are opportunities. However, you need to actually build new and develop your existing organisational teams, to be able to handle these asset classes.
Erik: Solvency II has not motivated us to go into any particular asset classes and in fact, to some degree, it is actually the opposite due to the heavy reporting requirements that it has incurred.
Felix: Our investment philosophy has not changed as we already use a liability driven investment strategy, which is quite close to the rules of Solvency II. We are subject to additional regulatory regimes, like the Swiss solvency test. It is helpful that all these regulations are close to an economic view, although there are minor differences between the various regulatory regimes.
