As market uncertainties abound and new regulatory frameworks need to be implemented, the fact that high interest rates are back, and the consequence that investment decisions are somewhat more straightforward – in a traditional sense, if in no other – is worth pondering. At least that was what delegates to AsianInvestor’s Insurance Investment Briefing Hong Kong heard at the event on March 10.
With higher rates, fixed-income products are once again more attractive and able to serve as cornerstone investments in insurers’ portfolios.
“We’re all going through short-term pains, but we’ve been crying for 15 years, as insurance [chief investment officers], for higher rates,” Robert Turnbull, managing director and head of asset management for Asia at Swiss Re, told conference attendees. “It’s been a long time. It’s great to see [high rates], and after we’ve complained for 15 years, we can’t complain too much about the current situation.”
Gregoire Picquot, chief finance and investment officer at BNP Paribas Cardif, said that although 2022 had been a tough year for insurance companies, their balance sheets and their clients, it was hard to focus only on the adversity and the ripple effects still being felt this year.
“[This year] is an exciting year, because everyone is waking up with funding that allows creativity for my customers and internally, we can reopen doors that have been closed for a long time,” Picquot said.
He said that in parallel to managing portfolios, insurers also had the challenge of adapting to customers’ needs and being extremely proactive in the asset liability management to work with commercial teams to prepare portfolios able to benefit from the current environment.
Picquot said the key question would be how long current volatility would last, as most observers expected 2023 to see persistently high interest rates.
“We see an acceleration in terms of dynamics, and we need to react extremely fast,” he said. “It might be a challenge for the industry overall, especially under [International Financial Reporting Standard] 17. You need to make decisions in terms of business mix, asset allocation and implementation while you are still learning, and that’s the exciting part.”
FEAR OF CRAZINESS
Although the still ambiguous IFRS 17 framework is one challenge for future portfolio mix considerations, current concerns include the US Federal Reserve’s action on interest rate throughout the year ahead.
Both Turnbull and Elton Shum, head of Asia regional fixed-income portfolio management and trading at Manulife, said equity markets remained volatile, and that too much positive economic and inflation data implied that the Fed would have to raise rates even more.
Shum said concerns over the potential of rates to go higher increased market volatility, alongside geopolitical tensions, but that the outlook was not entirely bad.
“Higher rates and volatility are actually good for insurance companies, and I see better buying opportunities,” he said. “We are buy-and-hold, long-term investors, and right now we can buy assets we like at a cheaper price.”
However, he also shared concerns over ambiguity in IFRS 17 and what investment decisions that could lead to among insurers.
“Whenever there’s a big accounting change, I worry that people will do crazy things because of the new rules and reporting,” he said. “We’re trained to make supposedly good economic decisions, and the accounting change is shifting the timing on when you get to realise the earnings.
“It’s a timing thing, and has nothing to do with real economics. But because of that, and investor analysts’ focus on quarterly earnings, my concern is that we may be driven into making investment decisions that are less than optimal from an economic perspective.”
On a more general insurance business note, BNP Paribas Cardif’s Picquot pointed out that IFRS 17 might mean that insurance companies would either have to learn to live with volatility or potentially reprice their products.
He said that although these issues remained at some distance from pure asset portfolio management, investment specialists would feel the consequences of potential structural change due to IFRS 17.
“At some point, we might have to deal with volatility budgets for equity for non-participating business,” Picquot said. “Insurance companies so far say everything is fine, as opposed to financial companies, but I think we’ll learn the impact of IFRS 17 our own way.”