Rich Sega: I’m the Global Chief Investment Strategist at Conning. This is my twenty-fourth year at Conning, the first eighteen of which I was the Chief Investment Officer.
I contribute to – but don’t dictate – our strategy to our client portfolio managers. I am a member of our investment policy committee, and my responsibility is strategy development.
The strategies are guidance for our portfolio managers, whose responsibility it is to make tactical portfolio implementations, which can vary across clients.
Our approach is bespoke and tailored to a company's profile, which takes in a lot of things such as liabilities, risk tolerances, market position, customer base, how much hot money they have in their products, tax and surplus positions. Whom are they competing against? What are their distribution outlets? This includes how [products] are sold, and client focus.
Rich: It was a great thing to receive that award and thank you to everyone involved.
Insurers, like most industries, experienced the impact of demographic and societal changes over the past five decades. They too are managing amid an ageing of the population, the emergence of flexible work arrangements, increased diversity of the employee base, the explosion of technology and the globalisation and digitisation of markets.
There are several trends specific to insurers that I've noticed over the years, and most of them have been good. The first one is the increased alignment of both sides of the balance sheet – asset and liability management. I started in this business as an actuary, and when I started there was not much communication between the line of business that raised the funds, the actuaries that priced the products, and the investment people who managed the money.
I was the first actuary in the investment department at my first company, and when I changed jobs about seven or eight years later, I was the first actuary in the investment department of my second company. Now, it’s commonplace: there are actuaries all over investment departments,, which is important as there are liability-driven investment (LDI) products in everyone's product suite.
The second thing I noticed is that, when I first got to the investment side, government bonds and corporate credit, both public and private, were exclusively held by general accounts.
"We know companies are faced with regulatory encroachment into
product design, risk classification, and mandated coverages."
Over time we've had a generation-long rally in bonds with interest rates clicking down, making income harder to get.
Interest rate trends and income pressure pushed insurers to broaden the universe of investable assets to include a wider range of risks. This included moving down credit into high yield and reducing liquidity by buying private placements, but it also drove consideration of option risk, prepayable products, structured products, emerging markets, and derivatives and hedging strategies.
This diversification has been very good for the industry.
A couple of things that are not so good: regulation tends to expand with time. We all know that companies are faced with regulatory encroachment into product design, risk classification, and mandated coverages, which is forcing insurers to cover risks not contemplated in pricing or underwriting when they started.
This is also forcing insureds to buy coverages they don't need or want, limiting their investment flexibility and requiring voluminous disclosures.
"There’s the threat of increased regulation. With the incoming administration,
I don't think this is going to get ramped up again."
Having said that, insurance regulators have done a good job of protecting the insured, particularly when compared to securities regulators over the years, so it's a mixed blessing, but it could be a drag on some innovative forces.
Also, there’s the threat of increased regulation, at least in the US at the federal level. With the incoming administration, I don't think this is going to get ramped up again, but the fear is that an overlay of federal regulation would just complicate matters without any benefit. The McCarran Ferguson Act keeps the regulatory structure largely at the state level, and insurers are used to dealing with it, but we’ll be watching for any changes.
Rich: There are always new things being added to the marketplace. Certainly, from the insurance company side, that's true.
There are always new ideas carrying new risks - cyber risk, AI – and these are risks that policyholders will expect insurers to cover. The insurers are going to need the actuaries to price the risk, and the actuaries are going to need data to assess it.
The more innovation there is in the marketplace, the more opportunity there is for insurers to profit by helping people handle the risk. Insurers have historically been innovators and early adopters of new technologies, which helps manage risks and expenses.
Rich: There have been benefits to widening the investable universe and diversifying, but it remains true that the biggest investment risk exposure that most insurers have, at least in my experience, is corporate credit – rates are just coming off generational lows and credit spreads are at historic tights. Insurance companies could be facing a period where this, at least for mark-to-market, could be draining and that's going to erode their current gains and may even turn to some unrealised losses in the next cycle.
"Forced sales to fund any type of outflow at the wrong time in the
markets can be costly from a capital standpoint."
This calls for a high level of diligence and surveillance in an insurance company’s credit book. A thorough analysis of liquidity needs and good ALM discipline may help avoid forced sales.
Forced sales to fund benefit payments, tax payments, or any type of outflow at the wrong time in the markets can be costly from a capital standpoint. That ALM discipline is important due to the demographics and lifestyle changes that we've seen emerge in society over the past few years; people are living differently and buying different stuff post-COVID-19.
There is a need for surveillance of the liquidity positions, as well as real estate exposures in portfolios, especially office and retail. They've been drastically altered by the change in lifestyle and work style we've had.
While these concerns are emerging as we speak, opportunities are there too, in AI, quantum computing, longevity products for life insurers, etc.
Wherever there are challenges, there are opportunities for inventive companies too. One thing I'm concerned about is that we face, particularly from a regulatory standpoint, an approach that favours larger companies that are able to absorb those expenses and have more capital. It's tougher on smaller companies that don't have ways to offset a weak run in one line with a compensating profit somewhere else.
"These small business owners have limited budgets, and they have specific
risks they want to take care of. The big guys tend not to do that."
The smaller companies are under stress in this environment. That's concerning, because if a small company folds or withdraws from a line of business then there's going to be fewer players in the market that are able to offer certain products, which means less innovation, and less competition.
In this respect I view the insurance industry like banking. What I mean by that is that the big insurers and the big banks tend not to tailor their offerings to the small business customers. These small business owners have limited budgets, and they have specific risks they want to take care of. The big guys tend not to do that.
This means it’s the smaller insurance companies and the regionals that are the ones taking care of those businesses and that relationship needs to be helped by the industry.
Rich: We've all had folks that we've worked with who we admired and learned from, and also we had some that we felt were less than beneficial.
Hopefully, we learned from them too as to what not to do as managers. However, getting that process and dynamic requires a decent amount of time in person in the office, and given the popularity of remote work, and flexible hours, it's critical that managers still provide opportunities to meet in person, explore, debate, and reason through ideas and challenges that arise in the business.
Getting the benefits of everyone's best thinking and learning together is the way to solve some of these problems. You don't want to get on a path and put blinders on. That's not how innovative companies win in the marketplace, and if companies are going to compete, you need that. If we're mentoring people coming up, trying to learn the culture, learn the business, and gain experience, then enough time has to be put in face-to-face.
Rich: It goes both ways. People who have come out of business school, graduate school, or college coming into the workforce have far better skills and capabilities for accessing information.
There's so much data out there and getting access to it is so important. There are a lot of sources of information and making it accessible in a way that you can analyse it is a skill people need.
However, what these people don't have - by spending a chunk of time working virtually or remotely - is direct communication skills. You get on a call, and you have things to talk about; there's an agenda, and you can discuss back and forth. It's the informal stuff: walking by the trading desk and hearing somebody talk about something and being able to join in. If you don't get that, you miss an opportunity.
"There are folks with skills, particularly in the IT and the digitisation front,
which is a boon, but the interpersonal aspect is somewhat lost."
If you're a portfolio manager and you have a position that you heard somebody talk about, then you use that informal connection to ask something quickly. It’s far better than sending a Teams message, and they're not there right now, and by the time they get back, you’ve forgotten about it.
It's a lack of those soft skills that slow down the ability of people to progress. There are folks with great skills, particularly in the IT and the digitisation front, which is a great boon, but the interpersonal aspect is somewhat lost.
Rich: From a positive standpoint, I believe the economy is in great shape, and that's good for a lot of things. It's good for insurance companies. It's good for business, because as businesses grow, their need for risk management grows, and that's our industry. We’ll be there to provide risk protection for growing businesses, innovation, and entrepreneurship, and that's important from the risk standpoint.
Geopolitics has been the dominant risk [in 2024] and it seems like it's going to continue into 2025.
One development that concerns me a lot, and it's been brought to light by the horrific assassination of an insurance executive and the reaction to it in some quarters, is the lack of appreciation and understanding of the role of the insurance industry in fostering prosperity, business growth, innovation and entrepreneurship. We need to reiterate that case in 2025.
