As inflation affects markets in the US and Europe, insurance companies have had to be creative and adjust accordingly to the new environment.
Investors now need to look for assets whose profitability is not overshadowed by the inflation trend, and this can be done in many ways and via different approaches, investment professionals from the sector told AsianInvestor’s Insurance Investment Briefing in Hong Kong on June 29.
Shiuan Ting van Vuuren, chief investment officer of Sun Life International HuBS, said that she includes a macro angle on inflation. Van Vuuren pointed out that the insurers are quite diversified, with US assets and Asian assets.
“There are rising interest rates and inflation but if you start breaking it down, you realise that the US and Europe are a run-away problem. There is some risk in Hong Kong and China, but I find the burning platform in the US and Europe. I might take different actions depending on the underlying asset’s country of origin,” van Vuuren said on stage.
She elaborated that the US is running at 8% to 9% inflation, with Europe not trailing far behind. When looking at Asia, inflation in China and Hong Kong is around 1% to 3%.
As a property and casualty insurer, CMB Wing Lung Insurance prefers a portfolio with assets of a shorter duration and more liquidity compared to his life insurer peers, chief investment officer Alaric Lau explained.
“One way of hiding from inflation is shortening duration, even to the point that we earn returns from bank deposits that are quite decent. Another [way] is to investigate different asset classes, alternative asset classes, in terms of private deals, hedge funds, that may have a lower correlation compared with the inflationary environment historically,” Lau said.
According to Robert Turnbull, head of asset management Asia and managing director at Swiss Re, it can also make sense for insurers to look across the total balance sheet when looking at the concerns that inflation inspires.
He pointed to four factors that life insurers should especially consider. Getting the pricing on new contracts updated quickly is one; while index causation in the policy wording is another — Turnbull considers this a very useful tool in new policies, and something that can make asset management significantly easier. Meanwhile, actual asset allocation, and reinsurance as a tool to stabilise the balance sheet, are also key.
“When we think about hiding from inflation, I would think about more from a total balance sheet perspective and looking at your total toolset across those four factors, rather than just purely picking your asset allocation,” Turnbull argued.
A DIFFERENT OUTLOOK
Meanwhile, William Chan, chief investment officer of HSBC Life Insurance, finds it very difficult to find a place to hide from inflation.
“Many assets have dropped a lot, and that is reflective of the rather tricky situation we are in. If you think about it, assets that tend to do well in a high-inflation, rapidly-rising-rate environment, are in many cases assets that tend to do badly in a recessionary environment,” Chan said.
He mentioned the example of equities, which are seen as offering hedges against inflation because companies can pass on the high prices to consumers. However, Chan argued, in a recessionary environment the same companies will not do well, and investors will prefer fixed rate and long duration products instead.
“Where we go or hide very much depends on which view you have; whether you think we are going to have inflation. The Fed has already done enough in terms of pricing in the market, and come next year we will worry more about slowing growth, so the Fed might not hike further,” Chan said.
“Alternatively, you think inflation is sticky and the Fed must hike in excess of what has been priced in by the market already, say 3% to 3.5%. If you think the hike will go to 4% or 5%, you definitely want to be more focused on the recessionary risk and position accordingly.”