Last week we were delighted to attend Insurance Asset Risk EMEA 2019. Our thanks and congratulations to Oli Henry and everyone at IAR for putting on such an engaging and ultimately successful event.
There was no shortage of exciting talking points on the day. The panel sessions and presentations addressed a multitude of highly topical themes facing the insurance industry including; the perils of protectionism and credit bubbles, a continuation in the trend towards direct investment, the likely impact of shifting accounting standards and the application of the Matching Adjustment across Europe. However, there were three topics which we found generated the majority of debate.
Firstly, Environmental, Social and Corporate Governance (ESG) can certainly no longer be considered a passing fad or, for the cynics, a mere PR exercise. Whilst the entire investment management industry is said to be increasingly supportive of ESG principals, it does seem that life insurers are going a step further than most by deeply embedding it into their asset allocation processes. Indeed, many insurers indicated that ESG is no longer sustained in styles and overlays, but actually mandated at the board level. Most hearteningly, the majority of CIO’s presenting were clearly in recognition of the good that they could achieve by centralising ESG into their investment decision-making processes, which surely augers well for society as a whole.
The second was a focus on the switch taking place from traditional to alternative forms of fixed income. As a catchall, ‘Alternative Fixed Income’ is necessarily nebulous: direct mortgage loans and distressed debt plus others could all validly be included in this emerging sector. Unconstrained Bond Funds were specifically discussed. At a high level, the ‘unconstrained’ label frees the investment manager from a mandate to follow or be compared to any particular benchmark. More broadly these funds allow for a more dynamic and potentially forward-looking approaches to duration and interest rate risk management than tradition bond funds. Recognition was also given to the meteoric growth in the attractiveness of private lending over the past few years. Yield hungry insurers seem keen to continue to increase allocation towards direct loans which have provided superior returns and also mitigate rate risk owing to their floating nature.
The final, and perhaps the most important subject discussed was progress made (or lack thereof) in the transition away from LIBOR towards new benchmark rates. Since the PRA distributed its ‘Dear CEO’ letters late last year, the insurance industry has been charged to take a proactive and leading role in mapping a way forward. However, it’s fair to say that the first half of 2019 has not seen material progress, perhaps as participants continued to digest guidance, other issues prevailed and some hoped for row-back. However, regulators have once again reiterated their steadfastness on ending LIBOR as planned in 2021. For insurers specifically, much more guidance is required from EIOPA on how liability discounting frameworks will evolve and the industry in the U.K. is actively lobbying in this regard. The consensus was certainly that the second half of 2019 would see a significant uptick in planning and action by firms as LIBOR focus really begins to crystallise.
The topics covered at the Insurance Asset Risk event aligned with the focus of much of our work here at FINCAD. We are helping firms with the valuation of esoteric, emerging asset classes and also assisting them in getting a handle on LIBOR transition. Our powerful risk and valuation platform, FINCAD F3 offers the unrivalled ability to forensically model non-vanilla asset classes such as private debt, ABS/MBS and direct investments.
In addition, the curve-building capability of F3 empowers buyside firms to plan the shift from LIBOR to new benchmark rates in a simple and flexible analytics framework. If you need help with these or any other insurance analytics challenge, FINCAD can certainly assist. Check out our F3 for Insurers datasheet for information on how we can help.