Persistent inflation and natural catastrophes are causing a more volatile insurance market, but there is some good news for insurance companies on the investment side.
Insurance companies will be looking to offset underwriting losses with investment portfolios and make the most of opportunities from current Treasury yield levels, according to Insight Investment’s head of insurance portfolio management, Kerry O’Brien (pictured).
"Given where current UST rates are, you can earn 6%-plus yields in investment grade corporate bonds,” she said.
With this “return of yield,” carriers are able to build an investment portfolio that is robust, diversified, liquid and will be able to offset the risks of liabilities.
This higher yield environment is thanks in part to consistent Fed rate hikes throughout the year, according to O’Brien.
“You want to make good decisions pricing the risk of your underwriting and then pricing the risk of your investment portfolio,” she added.
In an interview with Insurance Business, O’Brien spoke about why insurance companies need to re-evaluate their enterprise risk management processes and how the ESG movement is affecting the investment appetite of American businesses.
Since the pandemic, there have been a few key developments that have shaken up the insurance sector across the nation, including geopolitical strife, continued focus on climate change and persistent natural catastrophes, as well as inflation.
“A big part of a carrier’s business is not just underwriting, but the investment side of their balance sheet,” O’Brien said.
According to Insight Investment analysis, banking sector stress, especially with the collapse of Silicon Valley Bank (SVB), has showcased liquidity risk and has prompted both insurance companies and investment managers to seek diversification and awareness of where liquidity is held.
Costly weather events combined with poor investment results in 2022 reduced the amount of capital available to insurers to write new business, which has also driven up reinsurance costs.
Additionally, while inflation is eroding premiums and increasing claims severity trends, it has also resulted in the worst year for bond returns ever and the first time that bonds and stocks both lost value in almost 50 years.
This has led many insurance companies to re-evaluate enterprise risk management processes alongside either an internal or external investment portfolio manager in order to use these assets to lead to an excess surplus in the face of an increasingly hardened P&C market.
O’Brien has noted that a number of carriers are now looking to outsource investment portfolios to managers with an insurance specialty, pointing to the case of AIG diverting its $150 billion general account to BlackRock.
“It’s not all about achieving a return that beat the benchmark,” she said.
“It’s really understanding the liability profile and constructing portfolios that maximizes the asset size to support increasingly unpredictable liabilities.”
Tapping into professionals who knows the ins-and-outs of insurance and speaks the industry language is crucial to developing and diversifying a portfolio.
“It’s a heavily regulated business,” O’Brien added.
“You need someone to be plugged into the regulatory side just as much as the liability side of the business, especially as it can vary state-by-state.”
As ESG initiatives take over the insurance industry and investment in traditional fossil fuel companies becomes complicated, carriers are working towards changing their investment portfolios.
However, “there’s different degrees of where insurers are on their ESG path,” O’Brien said.
Insurance companies in different regions and different political climates tend to be at varying stages.
“I know a number of insurance companies in Texas feel very differently than say some other states that are energy suppliers, producers or extractors,” she noted.
There has been an uptick in clients looking to investment managers to help them disclose their ESG-related risks in their portfolios, O’Brien said.
While the United States may be behind Europe in terms of assessing and addressing these concerns moving forward, O’Brien thinks that this will only increase as time progresses.
“Five years from now, I think we’ll see more and insurance companies and other corporate clients place more emphasis on ESG factors when building their investment portfolios.”
