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Over a dozen Chief Investment Officers (CIOs) and other financial, treasury, and investment professionals from some of the biggest and most innovative P&C, life, run-off, and other insurance companies across Europe have taken part in the inaugural meetings of the Insurance Investor advisory boards.
The discussions were designed to be an anonymous sounding board for those in the industry to share thought leadership and talk about day-to-day issues in granular detail with like-minded colleagues from across the industry. They were held in Q1 2024 with a separate board designed for North America.
The discussions covered three questions:
· What are the major issues either helping or hindering your ability to meet general account investment goals?
· What emerging themes – for example, investment, regulatory, investment operations / running an investment team, etc – are you paying attention to, and why?
· What are the emerging functions and skill sets required to effectively run a general account investment department/team? How are you addressing these needs?
“It’s a challenge to find assets that match liabilities, convert currency in the tail, and pass exposure to clients via the collateral structure,” said one CIO at a Bermuda-domiciled life insurer that is run from London.
The first question garnered the widest and most in-depth answers from the panel with many giving multiple reasons for their responses. They added that it’s the same situation in Japan – where teams often have to turn to US assets. The issue of liability matching was raised across the board with almost all of the dozen or so participants mentioning it in some capacity.
Others added that long-duration assets were always a challenge, “especially when you’re locking in illiquid assets, and the depth of the market for longer-duration assets is lacking”.
“We’re worried about government debt that is going to hit, quantitative tightening, challenge over funding,” said a Head of Financial Risk at a life insurer. “Do you really want to take more risk for a marginal increase in the return?”
“We’re willing to accept a negatively sloping spread curve, which is a very strange phenomenon,” said a CIO from a life insurer.
“We need a sensible platform for implementation.”
A CIO from a P&C company said that investment operations transition from one asset manager to another, which is causing “a lot of strain” and multiplying risks to manage. Other effects included more governance committee meetings – for the need to be able to manage and distribute strategy – and management of liquidity risk, which has upped team workloads and created internal stress.
One CIO said that operating models and balance sheet management had changed rapidly in the past several years and created a lot of strain on investment teams.
The CIO from a run-off investor said that he “worries about meeting liability cash flows”, as well as the regulatory aspects. “We need a sensible platform for implementation.”
Others highlighted that investment opportunities within the UK have to be of the “most importance”, a theme that has been highlighted by several high-profile industry figures.
A Chief Credit Officer from a life insurer said that, in addition, seeing foreign capital coming back was essential as it would help the UK “regain credibility”.
She added that the heavy, often-mentioned 2024 election cycle “[doesn’t] have an impact at all, due to being relatively value-driven” – which is a sentiment in opposition to US counterparts that mentioned it as a risk, especially in larger middle-income countries where there could be violence or political issues.
Instead, the Credit Officer said, her company was more interested in whether the UK and other major economies were in recession or not.
Several major themes were covered in this area, including wildly divergent views on the pros and cons of ESG and whether its place in the investment world had been assessed correctly. Related topics included the adequate amount of administrative support needed to effectively make sure one was compliant with regulations.
Elsewhere, an increasingly fragmented world order and the risk of large-scale conflict or disruption to trade flows were also highlighted. Geopolitical tensions have been high this year, and for the participants it was no different with the fallout of the Russian invasion of Ukraine, Gaza, the continuing tensions of China and Taiwan, and the China/US quest for superpower status, all featured in the conversation as potential risks that were keeping participants awake at night.
“How do you embed [ESG considerations] into
day-to-day decision making?”
One participant said that, in terms of treasuries investing, they were unsure why one would take on unnecessary risk in this area – especially in the long term. They listed ESG as an emerging theme and added that it could lead to changes to the “whole investment policy”. They added their philosophy was to try and stay in the middle of the pack so as not to be a leader or a laggard.
They also added that the market was changing rapidly when it came to risk – and its potential reward – when it came to angles around capital. Focusing on ESG, one CIO said the US was ‘behind’ – adding that a ‘scattered approach’ in other parts of the world meant it was difficult to see a path forward that wouldn’t require expending a lot of energy to stay compliant and on the right side of public opinion. “How do you embed [ESG considerations] into day-to-day decision making?” he asked, speaking about how rapidly it is changing. “It will probably take a while to figure out.”
Other opinions abounded on ESG matters. One participant said, “Biodiversity is just a trend.” Others agreed, listing geopolitics as a primary theme they were paying attention to. “[Risks] are also getting ever more concentrated,” one UK P&C insurer’s CIO said, as well as intertwined. These included ESG considerations, especially around China, and around healthy equity books too.
Other topics were also mentioned – such as the UK’s changes to investment and solvency, with many saying the post-Brexit realities would lead to wider investment changes. One CIO for a life insurer said the “concept of ‘investing in UK’” was something they were seeing and hearing a lot about – and that various mechanisms were being introduced to try and encourage it such as the solvency reforms and the Mansion House Compact.
However, they highlighted the volume of debt in the UK market for large companies, such as water and utility, saying that the UK fiscal situation was precarious in an election year, and they were monitoring what this meant for any change of government and medium-term strategy.
Finally, several participants flagged concerns about the level of private equity (PE) money in the market and what it could mean. “The influx of private equity is having a significant impact on investment strategy,” said one CIO.
Another echoed this: “The volume of private equity money that’s coming into the insurance industry, which is potentially a sensitive topic, as well as how this is affecting changing of ownership will have a big impact in the coming years.”
Another asked, “Why is PE so bad?”.
“There is this mythology about asset stripping,” he said, implying it was overdone and said that the “UK market is so regulated that this would be difficult”.
On this question, there was one area that stood out for everyone: data and technology. A CIO at a life insurer said that his team needed ‘translators’ – for example, data scientists who could translate data into investment language, especially around the ESG investment case.
The theme of shifting skillsets was picked up by others, who highlighted that there was a need for investment team recruits to have the ability to articulate and communicate. “[We] need to think differently about recruiting, hiring, and how people can thrive best in an environment – we need to think about accommodating talent – and we need to bring other skillsets and backgrounds to get a diversity of thought,” he said.
He added that the role of the CIO was evolving and changing, and “[we] have to think more about investment strategy, for not necessarily investment reasons”.
“It’s still problem-solving, not panicking, and communication skills
to grasp and explain complex problems."
A Head of Responsible Investment at a UK life insurer said they wanted candidates who had strong quantitative skills, particularly on the client side. She added it was difficult to recruit the right skillset, and that her organisation was “trying to make [the role] attractive through other opportunities and flexibility”. She added that, as new areas such as biodiversity come to the fore, finding candidates with the “right skillset” would continue to be a challenge.
Others disagreed and said they don’t see much change in terms of the skillsets needed. “It’s still problem-solving, not panicking, and communication skills to grasp and explain complex problems. Look at all investment professionals and adjust for background, [you] don’t need detailed knowledge,” one participant said.
He added, however, that recruitment in the future would mean waiting longer and paying a premium and putting more resources in for more diverse candidates. He also highlighted the need to be more open-minded about neurodiversity when hiring and creating a culture where employees weren’t judged for small mistakes. This, he continued, would be beneficial to the team in the long run by creating more ways of thinking as well as opening up the talent pool.
Others also highlighted new programmes as a way of creating changes. The Head of Responsible Investment said they were using ChatGPT to “look for things in legal and large documents”, which made the process quicker and less susceptible to bias or human error.
Skillsets, recruitment, and geopolitics all played the biggest part in European senior investment figures’ conversations. Representatives from Germany and the Netherlands who took part in the conversation were more concerned with the business looking forward and how it would react to changing issues – such as AI, the continuing risk profile, and new threats coming down the pipeline.
For UK participants, it was more immediate, with current geopolitical tensions and in-house issues such as staff retention and upskilling that were prescient concerns.
In comparison to the North American respondents, ESG was more prevalent; however, personal taste on it was more diverse than expected, with a variety of views on its efficacy that mirrored the wider political spectrum in society. Nevertheless, few, if any, suggested that less resources be dedicated to its deployment.
No matter what the issues were, all agreed that insurance and investment were going to continue to change – and the necessity of agility and adaptation in a fast-moving world was paramount.
