Mr Patrice Conxicoeur of HSBC Global Asset Management sketches the upcoming investment landscape facing insurers in Asia.
Investors will be intently watching the direction of interest rates over the next few months as the US Federal Reserve and the European Central Bank (ECB) look to be heading in opposite directions in terms of future monetary policy. For months, the Fed has expressed intention to tighten rates in the near future, while the Europeans are looking at introducing a US-style quantitative easing programme.
What is certain is that interest rates will start moving very soon, and insurers should take a prudent approach to guard against an uncertain environment, said Mr Patrice Conxicoeur, Managing Director & Global Head of Insurance Coverage, HSBC Global Asset Management.
“It is best to try and match liabilities so as to neutralise as much as possible interest rate fluctuations,” he said.
Rethinking chase for yields
In recent times, insurers have taken to alternative asset classes as they seek higher yields to compensate for sluggish investment returns. While there is still value to be had in some of these investments, Mr Conxicoeur felt that insurers are beginning to re-evaluate their strategy.
“While this is in no way uniform, we do have the end of the race to the bottom (of the credit scale) in sight, due to changing risk appetites and valuation concerns.”
He added while alternatives can deliver uncorrelated returns, they are also illiquid and complex and thus present a challenge to investors.
“What those assets deliver after costs of access, how quickly capital can be deployed, what governance is required, and how scalable they really are, those are all questions which deserve careful consideration.”
Impact of regulatory reforms
Another area where insurers will be doing much pondering is on changes in regulations. New solvency and risk-based regimes have already been or will soon be introduced in much of Asia, and will have an impact on how companies think and strategise.
In the long run, there would likely be more incentives for a better alignment of assets and liabilities, more focus on risk and risk modelling, and a more level playing field within and across markets, he said.
“Altogether this probably means more reliance on fixed income investments and less on equities. This will however take several years.”
Diversification is key
When asked what would be a prudent investment approach while navigating through an uncertain environment, Mr Conxicoeur again stressed on the importance of liability matching in order to minimise liquidity risks.
He added that diversification remains the way to go for insurers in the region.
“Diversification is still under-utilised by insurers, as is the possibility of hedging currency risks in some countries. Most Asian markets have neither the depth nor the variety to cater to all the investment needs of Asian insurers. International diversification, with proper treatment of currency risks, is the only free lunch in financial markets.”
While being prudent is useful, Mr Conxicoeur also commented that on the flipside some P&C insurers may be too conservative and thus are losing out on the opportunities available.
“I am still struck by the fact that some P&C insurers in the region have large amounts of cash on their balance sheets, much more than required by the business. While they may appear prudent, the opportunity cost of these positions is