Opportunity presented by bank disintermediation
The reinsurance industry should consider alternative investment opportunities created by bank disintermediation in their hunt for returns in the present troubled investment environment.
That is the view of Russell Büsst, managing director and chief investment officer—Europe at global insurance asset manager Conning, who added that the industry needs to end its unerring focus on the liquidity of assets and instead consider alternatives to pep up their balance sheets.
Speaking with Bermuda:Re, Büsst said that reinsurers would do well to consider bank loans, supply chain finance and SME lending alongside more conventional assets as means to enhance yield in their asset portfolio. He said that in many instances government backing for lending to SMEs and supply chain finance make them an attractive prospect, but one that reinsurers have yet to fully consider. Büsst said that the industry is increasingly aware of the benefits associated with government support on such investments, with the next step being to get acquainted with the structure of alternatives such as collateralised loan obligations (CLOs).
He said that as a result of the financial crisis, the business model of the banks has changed for good. Büsst said that going forward the banks will operate with far lower levels of leverage and growth would, as a result, be more muted. This presents opportunities for reinsurers willing to enter into some of the alternative asset classes deserted or pruned back by the banks, said Büsst. Such instruments also offer the opportunity to insulate reinsurers from interest rate shock, with CLOs offering floating rates, while bank loans, SME and supply chain finance are all of relatively short duration.
The beauty of diversity
Büsst said that reinsurers are inevitably pursuing higher investment returns where possible, but that risk mitigation is very much the key to the current investment environment. In order to achieve this, reinsurers need to pursue diversification he said, although he cautioned that many of the risks facing the industry—such as political risk in Europe— cannot be easily hedged against.
Büsst agreed that a number of reinsurers were looking to keep their powder dry in the face of current conditions, awaiting a turn in the underwriting or investment environment before considering deploy capital. However, he added that many might do better exploring alternative assets to enhance their investment returns, particularly considering the current situation is unlikely to improve any time soon. Downside risk nevertheless remains significant, , with reinsurers needing to find ways to adjust to a new investment norm. Alternatives may yet form part of this puzzle, Büsst concluded.