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The inherent conservatism of re/insurers is discouraging them from considering asset allocations that can help increase investment returns without any corresponding increase in volatility.
That is the view of Robert McElvanney, investment advisor at Aon Hewitt, talking in London about the opportunities re/insurers have to pursue more aggressive asset management strategies.
McElvanney says that the sector’s focus on liquid assets—cash and corporate and government bonds specifically—is reducing the potential to increase investment returns.
Currently, members of the Aon Benfield Aggregate—a barometer of leading global reinsurers—hold 79 percent of their investment portfolios in fixed income investments, cash or cash equivalents, an emphasis that has remained relatively static since 2006.
However, asset performance within the Aon Benfield Aggregate has been on a slowly downward trajectory since 2009, falling from a 5 percent return in 2009 to 2.75 percent return in 2013 and the expectation is that in 2014 the industry will experience a further decline in investment returns.
McElvanney suggests that re/insurers could benefit from pursuing senior secured loans and absolute return strategies—be it bonds or hedge funds—in order to strengthen their investment returns.
According to analysis carried out by Aon Hewitt, a re-allocation towards growth strategies would help to increase the expected annual return of a re/insurers asset allocation from 1.9 percent to 2.3 percent.
At the same time the volatility of the investment portfolio would in fact remain the same at 1.4 percent, although a growth allocation would incur a 20 percent Solvency II for market risk.
According to analysis from Aon Hewitt and Aon Benfield, a 0.5 percent increase in investment yield from 2.5 percent to 3 percent, would in turn strengthen ROE from a base point of 12.25 percent up to 14 percent, and would generate a 16 percent increase in company valuation.
There are therefore significant potential upsides to pursuing a more aggressive—but no more volatile—asset management mix.
Marc Beckers, head of Aon Benfield Analytics EMEA, says that the low interest rate environment—and by association, the investment environment—has been recognised as the leading risk facing the industry by a recent European Insurance and Occupational Pensions Authority (EIOPA) survey.
According to the EIOPA survey, the interest rate environment had risen from the fifth most significant concern in 2011, to the most significant in 2013.
He highlights that natural catastrophe risk has even fallen off the top ten risks facing the sector recognised by the survey, reflecting the strong capital position of the industry.
Aon Benfield, Aon Hewitt, asset management, insurance