Perfect storm requires innovative investment managers


A ‘perfect storm’ in the business environment means that insurance asset management in North America is at an inflection point that presents a considerable learning opportunity, according to Nicholas Liolis, chief investment officer, Axa Equitable, in the recent Insurance Asset Management, North America report published by Clear Path Analysis.

A very competitive insurance landscape has forced the industry to rethink the way it develops, prices and invests for its products, Liolis said.

Liolis identifies several key areas of interest in the report. The first focuses around the increased legislation that has been introduced in the wake of the financial crisis. He says this has restricted the activities of banks but created opportunities for insurers.

“This disintermediation has created a need for long-term financing that insurance companies are well placed to fill. Against this backdrop, insurance companies have the opportunity to broaden their presence in markets where most have not historically played,such as direct lending across the spectrum from small and middle market loans to infrastructure and real estate-based lending spanning the US, Europe and emerging markets.”

He notes that equity investing opportunities exist as well, across many of these currently non-core investment sets. “To play this role and capitalise on this potential, insurance asset managers, insurance companies and insurance regulators must acquire the expertise and build the infrastructure necessary to incorporate these investment risks as part of their standard processes, making them an efficient and sound part of the core investing strategies that have served as the cornerstone of insurance asset management for decades.”

A second topic is liability-driven investing. Liolis says the drop in equity markets and subsequent prolonged low interest rates exposed asset liability management (ALM) mismatches in many public and private pension plans. Large pension funding gaps naturally create pressure to focus on ALM and drive investing to more closely match liability characteristics.

“The current environment is putting similar pressure on the insurance industry. While insurance companies rightfully pride themselves on being solid asset liability managers, the challenging environment has illustrated that improvements are needed.

“Robust ALM requires a reasonable amount of certainty around liability cash flows, so one area of improvement would involve better understanding of policyholder behaviour. Nothing can make insurance investing more difficult than uncertain duration profiles and nothing can make duration profiles more uncertain than unreliable policyholder behaviour estimates. The industry as a whole must respond by improving the science in this area and designing products where the behavioural elements are predictable with greater accuracy and easier to understand and model.

“This effort leads naturally to product pricing. Asset management’s active involvement in insurance product pricing is imperative for the industry to sustain and enhance profitability.”

Nicholas Liolis, Axa Equitable

Bermuda Re