The current interest rate hike cycle is significantly impacting insurers’ investment landscape, according to Trevor Persaud, group head of investment strategy and solutions at AIA.
"Long-term returns are the key driver of asset allocation decisions," Persaud told the audience at AsianInvestor’s Insurance Investment Briefing in Singapore on September 27.
According to Persaud, this is particularly crucial for life insurers, who cater to clients with longer tenures.
Considerations regarding high rates, high inflation, and slow growth have more of a “tactical asset allocation feel” rather than being a long-term concern for these insurers, he said.
Persaud acknowledged that recent accounting regulation changes — IFRS 9 and 17— have simplified the decision-making process for insurers.
"I think the accounting regulation changes have really simplified our job. These changes have provided insurers with more clarity, particularly in terms of neutralising interest rate risk,” he said.
Highlighting the unique dynamics in Asia, Persaud said, "Unlike the West, it is a choice to what extent you might want to neutralise interest rate risk."
“Limitations in the physical market have prevented many insurers from fully neutralising this risk, but if you do believe this is a particularly high-rate environment, then it would be a very good time to neutralise your rate risk now," he said.
Contrary to his initial belief that inflation would recede, Persaud now considers the long-term implications of structural inflation along with environmental, social and governance (ESG) factors and climate change.
These considerations must be leveraged in order to inform strategic asset allocation decisions, he said.
"There might be some options that you would prefer: for example, real assets versus standard liquid equities. These are the types of more strategic asset allocation decisions that you may want to contemplate."
A HISTORY LESSON
Speaking on the same panel, Kim Rosenkilde, group chief investment officer at Singlife, urged investors to brace for unparalleled market conditions.
He stressed the need for market participants to be able to adapt in the face of uncertainty, all the while drawing from his personal experiences — including the havoc that was wreaked by inflation in the late 70s and early 80s.
"My father had to pay 24% mortgage rates," Rosenkilde said, emphasising the lasting impact of inflation on financial stability.
This experience has been fuel for his cautionary stance on interest rates and inflation, and his concern with the prevailing assumption among investors that the Federal Reserve is due to cut interest rates soon, he said.
“I think that's very presumptuous,” said Rosenkilde. “I also think there are a lot of things happening on the labour market side that we need to keep an eye on.”
Rosenkilde cited a number of historical examples where labour negotiations have caused significant shifts in inflation rates.
“In Europe, every time we’ve had inflation rates of a certain height, the unions have come in, and demanded the same salary increases,” he said.
Rosenkilde advises investors to keep a close eye on these developments, and advocates for investment strategies that align with indexation and real assets.
“These avenues could offer a safer haven amidst the turbulence,” he said.
Rosenkilde alludes to there being "two schools of thought" prevalent in the current market environment when it comes to interpreting the ongoing volatility.
“While this divergence may be advantageous for market makers and other industry players, it can be perplexing for individual investors like you and me,” he said.
While he does not necessarily view volatility as a problem in itself, Rosenkilde believes that volatility arises due to various factors such as term premium and the impact of labour negotiations on the economy.
“Gaining an understanding of these factors could enable investors to have some foresight, potentially extending their outlook to four or five years,” he said.