Insurers Can Navigate Challenges in Stressed Markets

June 25, 2018

Keywords: Fixed Income, Insurance Asset Management, Asset Allocation, Investment Strategy, Economic News, Outcome Oriented Approach

In any market environment, there will always be the potential for significant risks through various potential market stressors — continued low interest rates, equity market drawdowns, economic changes, global volatility,  or a shift in the credit cycle.

If an insurance portfolio is designed based on an arbitrary risk or return target, can that insurer be confident it will weather potential market challenges? Targeting a standard deviation/risk measure of 5 percent might help an insurer be confident in a portfolio worst case event, but it does not tell an insurer how key business ratios will react to a prolonged low interest rate cycle or what will happen to net investment income as spreads tighten further.

For this, insurers must be able to truly align the business and the portfolio, to see the impact on their business from market events — today and into the future. Is it more useful for an insurance management team to know that the standard deviation of the portfolio is 5 percent in a typical year or that the stressed surplus growth of the portfolio (the likely growth of surplus given a worst-case market event) is still a positive 3.6 percent?

Investing incurs risk, and it is impossible to design the portfolio to help achieve company goals without taking some risk. But it is possible to design the portfolio to weather disruptions and help ensure it will still support organizational priorities.

In today’s rapidly evolving investment environment, insurers face a multitude of investment opportunities. Investment committees and leadership teams need to know the opportunities they select are likely to benefit the company without damaging the response to market challenges or crises.

They should be able to determine whether an investment portfolio’s future glide path — expected outcomes — supports company objectives and whether it effectively offsets the risk scenarios over a full market cycle. Is the portfolio simply based on historical risk or return projections or is there a link between the portfolio trajectory and the company’s desired outcomes in five years?

Done correctly, portfolio design or asset allocation should help deliver a portfolio with true direction that can weather challenges in difficult markets.


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