SEEKING
INVESTMENT IN NEW PLACES
With traditional gilts giving the lowest rate of return for decades, insurers have been forced to start looking for alternative sources of investment income. Intelligent Insurer investigates.
T
here was a time when insurance companies thought that all they had to do to guarantee stable investment income was to buy long-term government bonds (gilts) and then sit on them.
But with interest rates at historical lows in the US, UK and Europe,
gilt returns have also hit rock bottom, forcing investment teams within insurance companies to start looking about for something else. Many ‘something elses’ in fact.
First, some history. “It’s helpful to think about where the P&C market and the reinsurance
market have come from, why they have historically followed very liquid gilt-heavy strategies in the past,” says Gareth Haslip, global head of insurance strategy and analytics at JP Morgan Asset Management.
“You look at the historical asset allocation in the Lloyd’s market or the wider P&C market over the last 10 years, and how it’s changed after the
“Before the global credit crisis P&C insurers would generally have very
stable and global investment strategies, with a heavy focus on cash, gilts and some allocations of corporate bonds, and those strategies served them well in that period of time, when interest rates were much higher and they’d get the level of return they were seeking with a generally quite low- risk investment strategy.
“The focus of the Lloyd’s market and some of the Bermudians tended to be more around underwriting strategy and their capital providers were generally focused on the underwriting abilities of the businesses as opposed to their investment teams. Most of the specialist reinsurers or Lloyd’s places tended to have quite small investment teams,” says Haslip.
“As we moved through the credit crisis interest rates fell to rock-bottom
levels and they’ve been there ever since. We’re supposed to be in a rising interest rate environment, but we’ve been talking about that for a number of years now and the rises haven’t happened yet. When you add on what’s been happening to the Chinese economy and other developments, those rises might be delayed yet again.”
As a result, Haslip says, insurance companies are asking themselves
what to do now that their traditional investment strategies are no longer providing the level of return they used to. “We’ve been seeing a lot of
and Wilma, that was a very bad underwriting year but if you take the Lloyd’s market as an example much of that underwriting loss was offset by investment income that year.
income buffer would not be able to support a large underwriting loss. So it’s helpful for insurance companies now to think about taking other
www.intelligentinsurer.com November 2015 | INTELLIGENT INSURER | 47
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