WATCH: Four Big Trends Influencing Insurance CIO Strategy
Estelle Castres, Co-Head Western Europe, Head of Global Key Insurance Clients at Natixis Investment Managers International, highlights the key findings of our 2019 Global Insurance Survey.
A decade of ultra-low interest rates has inflated institutional liabilities and widened a duration mismatch for insurers. Desperate for alpha, investment teams are turning to private equity, private debt, and other alternatives to fill the void left by meager bond returns. But many find that the same regulations designed to ensure solvency after the global financial crisis are limiting their ability to generate returns and, in turn, meet their growing liabilities.
The 2019 Natixis Global Insurance Survey shows a majority of CIO teams find it increasingly difficult to generate alpha, protect assets, and monitor the cost of capital in today’s environment. Learn more about the factors impacting insurers’ investment strategy.
Ten years in, low rates still pose big investment challenges
Even after a decade, the central bank policies put tremendous pressures on insurers, making low interest rates the top portfolio risk for three-quarters of investment teams. But concerns run deeper than rates. Large numbers of insurers report that fears of an economic slowdown and growing geopolitical risk weigh on their minds as well.
Top portfolio risk concerns for 2020
The drive for alpha leads to illiquid assets
Today’s low rate environment presents insurers with a wide range of investment challenges. Nine out of ten say they are concerned about lower investment returns. Large numbers also say they’re concerned about their ability to generate alpha and the asset-liability mismatches presented by today’s interest rate environment.
Rate environment presents significant concerns – ■ Not at all ■ Somewhat ■ Extremely
Regulation is tighter and more complicated
While the goal may be to boost returns, most report that capital requirements have oriented portfolios to lower-yielding fixed income assets, rather than the higher return potential of alternative investments. As a result, a majority believe that tighter capital and valuation requirements have a negative impact on portfolio diversification.
Regulatory compliance presents a range of challenges
in risk management
(Own Risk and Solvency
Assessment (ORSA), etc.)
The impact of regulation is felt across the spectrum of insurance company activity. In particular the difficulties for CIO teams center on increased capital requirements and implementing changes in risk management to comply with solvency assessments.
Outsourcing for investment expertise
The landscape is complicated and requires new thinking. Almost two-thirds of CIO teams surveyed say they are outsourcing at least some strategies to get the specialist capabilities they need – especially in the areas of emerging market and high yield strategies.
Just how much they will commit to alternative investments and to external managers will be driven by the challenge of balancing the need for investment returns and requirements that establish their risk budgets.
Read the full report
Learn more about how insurers are juggling alpha generation and regulatory challenges.
Natixis Investment Managers Global Survey of Insurers conducted by CoreData Research, July and August 2019. Survey included 200 investment professionals from insurance companies throughout Asia Pacific, France, Germany, Nordics, US and UK/Ireland.
All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
The data shown represents the opinion of those surveyed, and may change based on market and other conditions. It should not be construed as investment advice.
Alpha is a measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.
Alternative investments involve unique risks that may be different from those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.
Diversification does not protect against a profit or protect against a loss.
Duration risk measures a bond's price sensitivity to interest rate changes. Bond funds and individual bonds with a longer duration (a measure of the expected life of a security) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations.
Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.