exposure and adjustments to investment strategy. For instance, increased exposure to catastrophe risks (whether hurricane, natural disaster or a major medical event), suggest that insurers will be required to define capital exposure at the same time as actuarial assumptions and liability-matching targets are being adjusted for revised loss experiences.
Underwriters will continue to claim that the risk in the business is taken
from underwriting and not investments, but this is plainly no longer the case and the investment committees will be called upon to recognise fully the potential impact to solvency capital from the risk taken in the investment portfolio. In particular, they will have to consider both the downside risk from a foreseeable extreme event and its potential impact on net tangible assets, and how best to use the investment return on capital allocated 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 will now be seen as 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 insurance market with anticipation. An investment-savvy board, with senior management who understand the risks on both sides of the balance sheet and who have the tools and resources to look through and interpret the asset risk effectively, is likely to have a competitive advantage.
Ultimately, the change in regulation presents a great opportunity to
those with the ability to develop effective investment strategies that not only fully support the liabilities of the business but also are rigorously constructed to generate positive risk-adjusted returns on capital.
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
Matthew Hutchinson is a former portfolio manager at Allianz Insurance UK.
Spring 2012 | INTELLIGENT INSURER | 29
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