Interview: Charles Pears, Insight, a division of BNY Mellon
22.10.12 MONDAY
The adoption of liability-driven investment techniques can allow insurers to Charles Pears of Insight Investment.
I
should consider liability-driven investments (LDI). That is the opinion of Charles Pears, head of insurance product at Insight Investment (Insight), a division of BNY Mellon. -
sion schemes, LDI refers to investment strategies managed with direct reference to the liabilities those assets are held to meet. An LDI approach will often work by establishing two portfolios with complementary objectives. “The creation of a ‘liability-matching’ portfo-
- ments to meet future claims costs, can release capi- tal that could then be invested in a ‘return-seeking’ portfolio targeting attractive long-term returns,” says Pears. The two portfolios would be managed very
differently, but in conjunction with each other and with a focus on aggregate risk and capital requirements. The liability-matching portfolio looks to match the duration of liabilities us- known maturity. These will include government bonds, investment-grade corporate bonds, cov- ered bonds and high quality asset-backed securi- through the use of instruments such as interest rate swaps as an overlay to achieve a more pre- cise duration match, according to Pears. “For example, an attractive three-year credit can be held alongside an interest rate swap to achieve the interest rate exposure required to match a seven-year liability,” he says.
matching portfolio designed to meet future claims costs. The return-seeking portfolio will look to achieve an attractive long-term return consistent with the risk appetite and capacity, determined by the remaining surplus capital of the insurer. This will normally be managed opportunis-
tically, potentially incorporating a full range of investment markets — equities, property, com- - while taking tactical positions dependent on the market environment and the outlook for individual asset classes.
Charles Pears, Insight, a division of BNY Mellon “In this way, the insurer is holding capital-inten-
sive assets only where there is a strong belief that these assets will provide attractive performance,” Pears adds. “The liability investment manager will be able to monitor the aggregate exposures of both portfo- This helps ensure that the overall risk is robustly available risk appetite and capacity of the insurer.”
insurers. Solvency II will force insurers to hold ex- cess capital for any market or investment risks that they take, as well as for their interest rate exposure, from their liabilities. “Long-term interest rate exposure is typically
not very well rewarded under Solvency II, because an insurer has an additional capital charge for any mismatch in the duration of assets and liabilities. An insurer’s default position should therefore be to minimise duration mismatch within the portfolio, but to take a conscious decision at certain times to
4 | INTELLIGENT INSURER —BADEN-BADEN TODAY | Monday October 22 2012
take a tactical duration position where this is a per- ceived opportunity to add value. Implementing a suitable LDI strategy for in- surance clients requires substantial experience and knowledge of the insurance markets. Insight with the associated tools and techniques to manage - several insurers. “We are already bringing these skills together
and we are receiving increased interest from across Europe,” says Pears. “As a pioneer in LDI, over the years we’ve de-
veloped a very deep expertise and proprietary tools - tion and interest rates. We are then able to build a cost-effective portfolio that aims to help the insurer There are few investment managers which have comparable experience or capabilities.”
www.intelligentinsurer.com
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