“ The use of an internal model for risk and capital calculation will allow more sophisticated players to correctly calibrate the underlying risks of the investment and reflect a more appropriate capital weighting.”
INVESTMENT GEARING
100% 80% 60% 40% 20% 0%
Total investment assets Chaucer
Catlin Hiscox
Ratio of investment to net tangible assets Amlin
Beazley How many times have underwriters explained that the risk in the
business is taken from underwriting and not investments? This is plainly no longer the case and the investment committees will be recognising the potential impact to solvency capital from the risk taken in the investment portfolio. In particular, they will have to:
• Consider the downside risk from a foreseeable extreme event and the potential impact on net tangible assets, and
• Assess the investment return on the capital allocated to the invested portfolio to improve the overall returns to shareholders.
Pillar 2 of the Solvency II regulation requires a much more intense degree
of governance than ever before. Market risk is a meaningful proportion of the total risk in insurance companies requiring greater focus on assets by board members and senior management, many of whom have little or no expertise in this area. It is no surprise to see major private equity houses looking at the Lloyd’s market with anticipation. An investment-savvy board, senior management who understand the risks on both sides of the balance sheet and have the ability to look through in great detail and interpret the asset risk effectively, will have a competitive advantage going forward.
Translating that understanding into appropriate underwriting and
investment strategies should result in positive risk-adjusted returns on capital for shareholders and can ensure that the Lloyd’s market continues to see positive overall results for many years to come.
John Townley is founder of i2i Partners and helps fund managers to understand the challenges and opportunities of the insurance asset management market. He can be contacted at:
john.townley.new@
googlemail.com.
Arthur Manners is the former CFO of a major Lloyd’s market insurer.
September 2011 | INTELLIGENT INSURER | 41
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